Powell's statement that 'the risk balance seems to be shifting, which may constitute the basis for adjusting the policy stance' triggered a global market frenzy last night.
- The U.S. stock market, gold, bitcoin, and U.S. Treasury bonds all surged, while the dollar index suffered a 'bloodbath,' marking the largest single-day decline since the 'Liberation Day' trend in April.
But this statement only triggered a market frenzy; the real 'salvation of the market' comes from another statement:
Monetary policy is not on a preset path; FOMC members will make these decisions based on assessments of data and its impact on economic outlook and risk balance. We will never deviate from this approach.
Powell's speech was very skillful, presenting a 'balanced narrative'—tariff-driven inflation may be temporary, while also acknowledging cracks in the labor market, leading the market to believe that changes not caused by political factors were reassuringly rising. If it starts like last year with 'it's time to adjust policy,' then the market reaction could be 'first a surge, then a crash'—because that would make the market feel that 'the Federal Reserve has yielded, surrendered.'
Secondly, the reason for the 'surge' is also a misunderstanding. For Powell, the best outcome is a 'small increase or small decrease,' but a big surge occurred last night.
Powell's expression was actually very cautious:
Before saying 'the risk balance seems to be shifting,' there were two prefatory statements;
Before saying 'we may need to adjust our policy stance,' there were 13 segments of groundwork laid.
Powell set the script for a 'small increase,' but the market had been 'suppressed for too long,' and when Powell slightly loosened his stance, a 'frenzy' erupted. In other words, if he hadn't loosened his stance, the market could have plummeted—if the rise last night was so jubilant, then the fall could be equally devastating.
This speech revealed three key signals:
A rate cut in September is almost certain, but the magnitude (25 or 50 basis points) will depend on employment and inflation data in the next two weeks.
The market may have run too fast, already pricing in a 'win-win combination' of easing and growth, but economic data remains a variable—non-farm data will be released on September 5, and CPI data on September 11.
Political risks are rising, and Trump has not given up criticizing the Federal Reserve after his speech, which may make investors more worried about the Fed losing its independence, potentially leading to greater volatility in the dollar.
The market still lacks consensus, which poses future concerns: Wall Street’s interpretations vary from cautious (be careful not to run too fast), to directly revising predictions (immediately increasing positions in rate cut trades), to bolder predictions (anticipating multiple cuts in 2025).
