The market's dovish interpretation of Powell's speech may be excessive. The core of it is weighing the labor market and inflation risks; a rate cut may indicate economic troubles rather than merely cooling inflation. This article is based on a piece by Li Xiaoyin, organized, translated, and written by Wall Street Journal. (Background: The Fed's mouthpiece: Don't fantasize about a substantial rate cut from the Fed! Restrictive easing is Powell's main theme) (Background information: The Fed is starting to worry about the U.S. real estate market: the market is clearly contracting, adding to recession concerns) American economist and Stanford University president Jonathan Levin believes that the market's dovish interpretation of Powell's speech may be somewhat overstated. Last Friday, Fed Chair Powell's speech at the Jackson Hole global central banking conference was widely interpreted as a clear signal for a rate cut in September, which instantly ignited market enthusiasm, pushing U.S. stocks to new historical highs. However, Jonathan Levin stated in a Bloomberg column on Saturday that a deeper analysis of Powell's speech at Jackson Hole reveals that its core message is not unconditional easing, but a difficult weighing of the dual risks of a sluggish labor market and soaring inflation in a foggy economic environment. Levin emphasized that the market's exuberant reaction on Friday largely overlooked the critical nuances in Powell's speech. He stressed that if the Fed were to cut rates, it might be due to economic troubles requiring central bank intervention, not simply because of cooling inflation. This significant context was drowned out by the market's initial reaction. The article emphasizes that Powell candidly admitted in his speech that decision-makers are facing a tricky task of balancing the dual mandate of promoting maximum employment and maintaining price stability. This policy dilemma suggests that the path for future rate cuts may be slower and more uncertain than the market expects. Difficult choices under dual objectives The article points out that when inflation soared to 9.1% in 2022, the Fed's goals were very clear, and policy consensus was relatively easy to achieve. But now, the situation facing policymakers is much more complex. Powell also emphasized in his speech: "When our goals are in such a state of tension, our framework requires us to balance the two aspects of the dual mandate." Levin explains that on one hand, although the unemployment rate is low, labor market data has begun to falter. On the other hand, inflation remains slightly above the Fed's 2% target. The article cites Powell's speech stating, "Our policy rate is now 100 basis points closer to neutral than it was a year ago," allowing the Fed to "proceed with caution." However, he simultaneously warned, "Monetary policy is not set on a predetermined path." This policy divergence has already manifested within the Fed. The decision to maintain interest rates at 4.25% to 4.5% in July drew opposition from two board members, marking the first time since 1992 that such a situation has occurred, highlighting the significant divergence in interpreting current economic data. Downside risks in the labor market The article emphasizes that behind the market's cheers for a rate cut, a key point that has been overlooked is that the Fed's main motivation for cutting rates may stem from concerns about economic deterioration. In Friday's speech, Powell specifically pointed out that the current labor market is in a "peculiar balance," with both labor supply and demand significantly slowing down, partly due to tightening immigration policies. Powell bluntly stated: "This unusual situation suggests that the downside risks to employment are rising. If these risks materialize, they could quickly manifest in the form of a sharp increase in layoffs and a rising unemployment rate." In other words, a rate cut would be a defensive move rather than a declaration of economic strength. The article notes that other data supports this concern. Powell mentioned that the U.S. GDP growth in the first half of this year was only about half of what it is expected to be in 2024, partly due to slowing consumer spending. This does not align with the fundamentals of the sustained bull market in stocks. The inflation dilemma remains unresolved While worrying about the labor market, inflation risks persist. The article states that many economists continue to worry that the tariffs implemented by Trump will push up prices in the coming months and even quarters. Although the current impact appears mild, industry insiders expect that when new model cars are released in 2026, the pressure on prices will become evident. How to address the price shocks caused by tariffs is itself a fiercely debated topic. Doves believe that policymakers should ignore these "one-off" price level changes; hawks worry that after enduring high inflation for nearly five years, this could exacerbate runaway inflation expectations. Levin believes that Powell himself seems inclined toward the camp that "ignores" the impact of tariffs, which may be one of the few dovish signals in his speech. However, he also clearly warned, "We cannot take for granted that inflation expectations will remain stable," and acknowledged concerns in this regard. Market reaction may be excessive The article concludes by emphasizing that the market's dovish interpretation of Powell's speech may be somewhat excessive, perhaps because investors previously generally expected his stance to be more hawkish, leading to position adjustments. The actual situation is far more subdued, but entirely appropriate for the current economic landscape. Beyond policy challenges, Powell's speech also cleverly sidestepped the political pressure from Trump to cut rates significantly. From any angle, Powell's speech showed no signs of succumbing to pressure. Levin stated that based on existing data, the Fed appears ready to cut rates as early as next month and subsequently explore appropriate interest rates that support sustainable growth and low inflation. However, the outlook remains highly uncertain, and the pace of policy easing may be slower than the market expects.