Federal Reserve Chairman Powell stated on August 22 at the Jackson Hole Global Central Bank Annual Economic Policy Symposium in Wyoming that the Fed may need to adjust its policy stance. This statement was interpreted by the market as a signal for a rate cut.
Powell said in his speech that this year, against the backdrop of comprehensive changes in economic policy, the U.S. economy has shown resilience. Regarding the Fed's dual mandate, the labor market remains close to maximum employment, and although the inflation rate has risen slightly, it has significantly retreated from the post-pandemic peak. Meanwhile, the balance of risks seems to be changing.
Powell stated that the upward risk of inflation has diminished, while the downward risk to employment is rising. The Fed's policy rate is 100 basis points lower than a year ago, and the unemployment rate remains very low, allowing the Fed to act cautiously when considering adjustments to its policy stance. In the context of changing baseline outlooks and risk balances, the Fed may need to adjust its policy stance.
Powell stated that the Fed released a revised (long-term goals and monetary policy strategy statement) that mentioned the Fed's return to a flexible inflation targeting framework. The statement clarified the Fed's approach during periods when the employment and inflation targets are 'not complementary,' meaning the Fed will take a balanced approach to promote the achievement of its dual mandate.
Powell noted that if the tightness in the labor market or other factors pose risks to price stability, the Fed may need to take priority action. The Fed's monetary policy must be forward-looking and consider its lagged impact on the economy.
After Powell's speech began, the three major U.S. stock indexes collectively rose during the session. The Wall Street Journal stated that Powell's remarks paved the way for the Fed to restart rate cuts. He pointed out that despite the labor market appearing stable, 'this is a strange balance,' caused by a simultaneous slowdown in labor supply and demand.
Bloomberg reported that despite ongoing concerns about inflation, the risks in the labor market are rising. Some Fed officials warned that early signs of weakness in the job market could evolve into an economic recession. Once the risks in the labor market materialize, the U.S. could face massive layoffs and rising unemployment rates.
