By David Rees, Emerging Markets Economist at Schroders

We ask by how much US interest rates might fall, question what “supply-side constraints” may mean for UK rate cuts and update our economic forecasts.

US FED Chairman Jerome Powell pivots to interest rate cuts at Jackson Hole summit

Chairman of the US Federal Reserve (Fed) has said that there is “ample room” to respond to a cooling US economy.

Speaking at the annual Jackson Hole gathering of central bankers his comments set the stage for interest rate cuts.

With the Fed set to announce rates on Wednesday, we project a one percentage point reduction in the Fed Funds target range, presently 5.25% - 5.50%, as sufficient to safeguard the economy and keep inflation in check.

Faster UK economic growth against backdrop of “supply-side constraints” leaves less scope for rate cuts

The first estimate of the UK GDP growth for Q2 was much better than we had anticipated, prompting us to upgrade our forecasts for this year and next.

However, limits on the supply side of goods and labour (supply side constraints), mean the economy is likely to run against its capacity to meet higher levels of demand which means inflationary pressures could well linger, leaving the Bank of England with less scope to front-load interest rate cuts.

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