US complacency on interest rates is over – and thank goodness for that

How long before the Fed can declare a victory over inflation and start cutting interest rates again? We don’t know, but I take comfort from the fact that at last the Fed is serious, writes Hamish McRae

The great debate in the US is whether the partial recovery in share prices since mid-June can be sustained (Reuters)

The Fed is for real. That was the immediate verdict of the markets on Friday after the speech by Jay Powell, chair of the Federal Reserve, at the central bankers’ symposium in Jackson Hole, Wyoming.

The message was that the Fed would continue to raise interest rates and reverse quantitative easing – that ugly expression for central banks pumping money into the financial system – until inflation came back to 2 per cent. That was its “overarching focus right now”, he said, and it would mean “maintaining a restrictive policy stance for some time”.

You might think that was anodyne stuff, but the markets had been hoping that there would be some signal that, if the US economy tanked, the Fed would ease up. There wasn’t, and the S&P 500 index fell by 3 per cent. Now, with all markets, these short-term swings merely reflect how traders had positioned themselves. I think we should wait until after next weekend’s Labour Day holiday to figure out what the Fed really means. Then we can make sensible guesses about what will happen through the autumn. Meanwhile, here are my half-down top takeaways.