The dollar fell, and the British pound rose to its highest level in over two years on Friday after Federal Reserve Chair Jerome Powell signaled that the long-anticipated U.S. interest rate cut would likely occur next month.
The weaker dollar also pushed the euro to a 13-month high, while the U.S. currency reached a 17-day low against the yen. During his keynote speech at the Kansas City Fed’s annual economic conference in Jackson Hole, Wyoming, Powell stated, “The time has come for policy to adjust,” noting that the risks to inflation have decreased, while the risks to employment have increased.
“We do not seek or welcome further cooling in labor market conditions,” Powell added. “We will do everything we can to support a strong labor market as we make further progress toward price stability. With an appropriate dialing back of policy restraint, there is good reason to think that the economy will get back to 2% inflation while maintaining a strong labor market.”
Following Powell’s remarks, traders continued to bet on a quarter-percentage-point rate cut at the Federal Reserve’s upcoming meeting on September 17-18, with the odds set at 65%. However, they also priced in about a one-in-three chance of a larger 50-basis point cut, up from just over a one-in-four probability earlier.
The euro and yen both strengthened, leading to a decline in the dollar index, which measures the greenback against a basket of six currencies. The index fell 0.81% from late Thursday to 100.64, having been slightly stronger before Powell’s speech.
Steve Englander, head of G10 FX research at Standard Chartered Bank in New York, commented, “I think the markets’ reaction, which has been the dollar a bit weaker, bond yields a bit lower, is about right. It’s not like he said, ‘Yeah, we’re going to do three (cuts of) 50s to begin the easing cycle.'”
“Implicitly, it opens the door to 50s at some point without giving a timetable for it. We still don’t think 50 (basis points) is going to be the first move, but it could come quickly if the labor market continues to weaken,” Englander added, referencing Powell’s remarks on inflation and employment.
A rate cut in September would mark a shift away from the Federal Reserve’s restrictive interest rate policy, which has been in place since March 2022 to combat inflation. The Fed funds target range has been raised from nearly zero to 5.25%-5.5% and has remained at that level since July 2023.