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Global markets in long wait

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U.S. Federal Reserve Chairman Jerome Powell is expected to deliver a keynote speech Friday at the Fed’s annual conference in Jackson Hole, Wyoming. Bankers from around the world are looking to Powell to explain the U.S. central bank’s strategy to continue reducing interest rates—despite the fact that the U.S. economy does not obviously appear to be slowing down.

After the Fed lowered interest rates in July—for the first time in a decade—central banks in other countries followed suit, a trend that the Fed might find hard to reverse. While it has emerged that U.S. policymakers disagreed over the July rate cut, the U.S. central bank is expected to announce another reduction at its Sept. 17-18 meeting.

Why is the Fed lowering interest rates?  U.S. Federal Reserve officials were also divided over the reason for the cut, but the decision was certainly shaped by global uncertainty caused in part by the U.S.-China trade war. “It’s clear that one of the Fed’s concerns is the slowdown in growth around the world—Germany and China in particular,” David Wessel, a senior fellow in economic studies at the Brookings Institution, wrote in an email.

“The Fed likes to say it isn’t the central bank of the world, but it can’t ignore the rest of the world and the impact that the global economy has on the pace of growth and inflation here at home,” he added.

Will markets react? Markets are already anticipating another U.S. rate cut, but they will be watching to see if Powell offers clues on where the Fed thinks the U.S. economy is headed. “I don’t know what Powell will say at Jackson Hole, but I’m sure he will be choosing his words very carefully because global markets will weigh each one of them,” Wessel said. “He will not predict an imminent recession: The Fed doesn’t see one on the horizon.”

What will the Fed decide in September? Expect another rate cut, but not a major shift. Unless something significant happens between now and September, “the most likely outcome is a quarter-point rate cut—not a bigger one,” Wessel said.

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