- Central banks worldwide are preparing for shifts in monetary policy, signaling potential volatility in financial markets.
- Concerns over slowing growth, labor market risks, and economic uncertainties in major economies contribute to a bleak outlook.
Jackson Hole, August 26 (FinanceFlashNews.com) – The outlook for the global economy is worsening as central banks prepare to shift their monetary policies, suggesting that financial markets are likely to face a turbulent period. This was highlighted during the annual conference of the U.S. Federal Reserve (Fed) in Jackson Hole, according to a report by Reuters.
The growing signs of slowing economic growth and increasing risks to the labor market are the primary factors influencing changes in monetary policy trajectories. Both the Fed and the European Central Bank (ECB) are preparing to lower interest rates.
Monetary Policy Trends
| Central Bank | Current Focus | Expected Action |
|---|---|---|
| Federal Reserve (Fed) | Shift from inflation control to labor support | Likely interest rate cut in September |
| European Central Bank | Easing price pressures, deteriorating growth | Expected interest rate cut in September |
| Bank of Japan (BoJ) | Ending decades of monetary support | Monitoring sustained price growth |
| People’s Bank of China | Responding to weak economic growth | Recent unexpected interest rate cut |
While attention in the U.S. and Europe shifts from high inflation to supporting the labor market, the Bank of Japan (BoJ) has confirmed its commitment to ending decades of monetary support as signs of sustained price growth emerge. The divergent monetary policy directions in the U.S. and Europe on one side, and Japan on the other, along with the persistent weakness in China— the world’s second-largest economy—indicate that global financial markets are in for a bumpy ride.
Central bankers, who gathered at the annual symposium, already witnessed what could happen earlier in August when U.S. employment data raised fears of a recession and triggered a sell-off in financial markets, which was further exacerbated by a surprise interest rate hike by the BoJ.
Many analysts still agree with the International Monetary Fund’s (IMF) forecast that the global economy will see moderate growth in the coming years, with a soft landing expected in the U.S., an acceleration in Europe, and a recovery in China. However, these forecasts rest on shaky foundations and may be overly optimistic, as doubts about the U.S. soft landing, the eurozone’s recovery, and China’s rebound—plagued by weak consumption—begin to surface.
Although major central banks are moving toward easing monetary policy, it is too early to determine whether this will be more of a “normalization” of restrictive policy or the first steps to prevent further economic slowdown. Due to this uncertainty, global stock and currency markets are likely to face a volatile period.
Federal Reserve Chairman Jerome Powell signaled in a much-anticipated speech in Jackson Hole on Friday, August 23, that the U.S. central bank will soon lower interest rates. However, he did not specify the exact timing or extent of the easing. “The time has come for a correction in monetary policy,” Powell said, adding that “the direction of monetary policy is clear,” with the timing and pace of rate cuts dependent on economic data, the inflation outlook, and the balance of risks.
The market overwhelmingly expects the Fed to ease monetary policy at the September meeting of the Federal Open Market Committee (FOMC). This would mark the first rate cut since the aggressive tightening that occurred from March 2022 to July 2023, during which the Fed raised rates 13 consecutive times. The key interest rate in the U.S. has since reached a 23-year high in the range of 5.25% to 5.50%.
New analyses presented at Jackson Hole showed that the U.S. economy may be nearing a tipping point, where the continued decline in job openings could translate into faster-growing unemployment.
ECB officials have also clearly signaled that the ECB will cut interest rates again in September due to easing price pressures and a significant deterioration in growth prospects.
Contributing to the weak global economic outlook is the situation in China. The world’s most populous country and a former driver of global economic growth is teetering on the brink of deflation. Other negative factors include the prolonged real estate crisis, rapidly rising debt, and poor consumer and business sentiment.
The weak economic growth in the second quarter prompted the People’s Bank of China (PBOC) to unexpectedly cut interest rates in July.
“China is a big player in the global economy. Slower growth in China also impacts the rest of the world,” said Pierre-Olivier Gourinchas, Chief Economist at the IMF.
Keywords:
Global Economy, Monetary Policy, Federal Reserve, European Central Bank, Bank of Japan, People’s Bank of China, International Monetary Fund
