Europe stocks close higher, euro and sterling climb as Powell says 'time has come' for lower rates

LONDON — European stocks closed higher Friday after Federal Reserve Chair Jerome Powell firmly signaled interest rate cuts ahead.

The Stoxx 600 index closed 0.5% higher, pulling further away from its level at the start of the month despite early-August volatility. The British pound gained 0.8% against the U.S. dollar to trade above $1.319 — its highest level since March 2022 — while the euro strengthened 0.58% to $1.118.

In his highly anticipated keynote address at the Fed's annual retreat in Jackson Hole, Wyoming, Powell said: "The time has come for policy to adjust... The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks."

Powell said inflation had "declined significantly" and that the central bank can now equally focus on supporting a strong labor market.

Markets had already fully priced in a September rate cut from the Fed, and put the probability of a 25 basis point rather than 50 basis point reduction at 67.5% after Powell's comments.

U.S. stocks rallied Friday morning in reaction to the speech.

Bank of England Governor Andrew Bailey is also due to speak at Jackson Hole on Friday.

Bailey will flag progress on U.K. inflation and the effectiveness of tighter monetary policy, saying that risks to the outlook from so-called "second-round effects" such as wage growth and price-setting are lower than was expected a year ago.

However, he will also caution that less "benign" scenarios remain possible that will require the Bank of England to "maintain restriction for longer."

These "would suggest that there are structural changes in product and labor markets going on which are causing the supply side of the economy to change as a lasting