Core points from Powell's speech on July 21.
Although Powell's speech that day was brief, it conveyed a lot of information, and the overall tone was interpreted by the market as 'dovish' (leaning towards loose monetary policy), paving the way further for rate cuts.
Emphasizing significant progress has been made: He explicitly stated 'substantial further progress in restraining inflation'. This is the most crucial statement, meaning the Fed believes its core task of raising rates to combat inflation has been largely completed.
Indicating that risks are becoming balanced: He mentioned 'the labor market has cooled considerably while remaining strong'. This indicates that the Fed's concern about the risk of 'excessive tightening leading to a surge in unemployment' is decreasing, and inflation risk is also within controllable limits. The risks of the two major goals (price stability and full employment) are becoming more balanced, providing a window for rate cuts.
Providing clearer signals for rate cuts: He said 'we don't want to see an unnecessary substantial weakening in the labor market'. This is interpreted as: the Fed does not want to wait until the economy (especially employment) actually faces problems to act; they wish to take 'insurance-style rate cuts' to maintain the health of the economy.
Summary: Powell's speech strongly suggests that the Fed's policy focus is subtly shifting from 'steadfastly combating inflation' to 'preventing excessive economic slowdown', clearing the last obstacles for a rate cut in September.
2. Trump's views on the stock market and their impact.
Trump has recently frequently expressed views on the stock market and Federal Reserve policies, but his influence is relatively indirect.
Core view: Trump has consistently claimed that if he is elected, the stock market will rise higher. He continues to criticize Biden's economic policies and repeatedly calls for the Fed to 'significantly cut rates', even suggesting that maintaining high rates is to assist Biden.
Substantive impact:
Political pressure rather than decision-making influence: Trump's remarks represent a form of political and public opinion pressure, but they cannot directly sway the independent decision-making of the Federal Reserve. The cornerstone of the Fed's legitimacy is its independence, which will not change its policy path due to the president's preferences.
Impact on market sentiment: His remarks can influence the emotions of his supporters and some market participants, potentially amplifying market volatility. If Trump is leading in polls, the market might trade on expectations of his policies that could stimulate the economy and inflation, such as 'tax cuts and deregulation', which might make the Fed more cautious about interest rate cuts.
Contradictory to Powell's goals: Trump desires aggressive rate cuts to stimulate the stock market and economy, while Powell suggests a cautious, preventive 'insurance-style rate cut'. Their goals and scales are completely different.
Summary: Trump's remarks are noise rather than a signal. They will not change the Fed's decision-making process based on data, but his remarks and the electoral situation are one of the 'political uncertainty' factors that the Fed cannot completely ignore when assessing the economic outlook.
3. Comprehensive judgment: How likely is a rate cut?
Very high. The market currently predicts an 80% or higher probability of the first rate cut in September.
Data support: Recent CPI and PCE figures (the inflation indicators most valued by the Fed) have significantly retreated, approaching the 2% target. Meanwhile, the labor market is indeed cooling (job vacancies are decreasing, and the unemployment rate has slightly increased), but it has not collapsed. This perfectly aligns with Powell's description of 'progress' and 'risk balance'.
Fed guidance: From the June FOMC meeting to Powell's recent speech, there has been a marked shift in the Fed's official guidance. They no longer discuss 'keeping rates at restrictive levels for a longer time' but have started to discuss the conditions and timing for rate cuts. The speech on the 21st is a reaffirmation of this shift.
'Insurance-style rate cut' logic is valid: The current economic environment (controlled inflation, economic slowdown but not recession) is the ideal scenario for implementing 'insurance-style rate cuts'. The Fed hopes to ensure a soft landing for the economy with slight rate cuts, avoiding the need for large cuts in the future.
Final summary.
Factors affecting the weight of rate cuts: Powell's speech (dovish) actively promotes: clearly suggests that rate cuts are imminent; extremely high inflation data cooling core support: the maximum prerequisite condition for rate cuts has been met; extremely high employment market cooling positive support: provides another reason for rate cuts; Trump's remarks slight interference: exert political pressure, but do not change the essence of decision-making; global economic slowdown positive support: external environment requires looser policies.
Conclusion:
The likelihood of initiating the first rate cut in September is very high. This is mainly based on the trend of U.S. economic data (inflation and employment) aligning with the Fed's expectations, and Powell's speech has almost confirmed the upcoming policy path.
Trump's remarks are more like an 'off-field factor' attempting to claim credit and exert pressure; he will say 'if the Fed cuts rates, it's because I applied pressure', but in fact, rate cuts are based on internal data-driven decisions, which are largely unrelated to him. Investors should pay close attention to the upcoming CPI, PCE, and non-farm employment reports, as these will be the key factors that truly determine whether the September rate cut is a 'done deal' or 'somewhat uncertain'.
