The Federal Reserve is set to cut interest rates at its September meeting after Chair Jerome Powell stated “the time has come” in his speech at the Jackson Hole Economic Symposium on Friday. This development raises questions about the potential global impact of a Fed rate cut. To shed light on this matter, International Monetary Fund (IMF) chief economist Pierre-Olivier Gourinchas joins Yahoo Finance Fed reporter Jennifer Schonberger from Jackson Hole, Wyoming to discuss his outlook on the the United States’s and global financial systems. Gourinchas notes that the US economy has been performing “very well,” with inflation decelerating, economic activity increasing, and the labor market cooling. “From this perspective, I think the Fed’s approach is entirely appropriate,” he says, underlining that the Fed has highlighted reduced inflation risks, thus creating room for rate cuts. Currently, Gourinchas expects one rate cut in 2024. However, he suggests that if economic data continues to support this trend, “I think we can expect a little bit more than that.” Regarding the impact on global markets, Gourinchas outlines two possible scenarios after the American central bank initiates a rate-cutting cycle: In a positive scenario, the interest rate gap between the US and other countries could narrow, supporting global currencies and allowing emerging markets to cut their own rates; Alternatively, a more volatile scenario could unfold if a sharp cooling of economic activity forces the Fed to ease more aggressively, negatively affecting emerging market economies. “The mandate of many central banks is really to first make sure that there is price stability,” Gourinchas tells Yahoo Finance. He adds: “As inflation comes down and you come closer to central bank targets, at that point a pivot, like the one we’re seeing right now with Federal Reserve and we’ve seen with other central banks to take into consideration the broader picture, when labor market pressures are not contributing to inflation pressures any longer or not significantly, then I think at that point you start wondering about maybe let’s make sure that we have, indeed, a soft landing.” Watch Federal Reserve Chair Jerome Powell’s full speech here:
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