Fed Chairman Jerome Powell stated that the United States is facing inflation pressure while the labor market is simultaneously declining.

At the annual central bank conference in Jackson Hole, Powell emphasized that the primary risk of recession comes from the declining labor market. This assessment increases the likelihood that the Fed will cut interest rates in September, leading to a significant drop in the USD index.

MAIN CONTENT

The Fed is facing inflation pressure and a weakening labor market.

The risk of recession primarily focuses on the declining labor market.

The likelihood of an interest rate cut in September is high, with a significant drop in the USD.

How does the Fed evaluate the current economic situation in the United States?

Jerome Powell assesses that the United States is facing the dual challenge of high inflation and a declining labor market. In his speech at Jackson Hole, he particularly emphasized that the slowdown in the labor market is a clear sign of an increased risk of economic recession.

The concentration on the labor market reflects the Fed's caution in controlling inflation while maintaining reasonable growth. Clearly, the recession is not only due to inflation but is also strongly threatened by rising unemployment rates and decreased hiring demand.

Powell stated that closely monitoring these factors is essential to adjust monetary policy appropriately, avoiding long-term harm to the economy.

Why is the labor market considered the focal point of warning about recession risks?

The labor market is an important indicator reflecting the health of the economy. When this market declines, as evidenced by a slowdown in job creation and an increase in unemployment rates, it will reduce consumer spending, capital absorption, and business revenues if prolonged.

Powell's focus on analyzing this decline is to warn that the U.S. economic cycle could shift into recession if stagnation in the labor market continues. This is also why the Fed is considering cutting interest rates to stimulate job growth.

What was the impact of Powell's speech and its effect on the USD?

Immediately after Jerome Powell's speech, the financial markets reacted strongly with expectations of a more flexible monetary policy. The likelihood of the Fed cutting interest rates in September is high, leading to a rapid decline of the USD index.

A weaker USD will facilitate riskier asset markets and boost U.S. exports. However, this also puts pressure on inflation as imports become more expensive due to the depreciation of the exchange rate.

"We are monitoring signals from the labor market as this is an important indicator of the direction of monetary policy in the near future."

– Jerome Powell, Chairman of the Fed, Jackson Hole Conference 2023

What is the likelihood of the Fed cutting interest rates in September?

Analysis from financial experts based on Powell's remarks indicates that the likelihood of the Fed reducing interest rates in September has significantly increased. This is due to inflationary pressures, which, although not alleviated, are underscored by signs of a declining labor market that emphasize the need to mitigate recession risks.

The interest rate cuts are aimed at stimulating growth and stabilizing the labor market amid weak labor conditions.

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