On August 22 local time, Fed Chairman Powell's speech at the Jackson Hole Global Central Bank Symposium was like a giant stone thrown into the lake of the financial market, creating waves. His remarks released clear dovish signals, opening the door for a rate cut in September, instantly igniting market expectations for a shift in the Fed's monetary policy.
Powell has released dovish signals, paving the way for a rate cut in September.
Powell pointed out in his speech that the downside risk to U.S. employment is rising, and regarding inflation, the impact of tariffs is more like a one-time price change rather than persistent inflation. He stated, "Overall, the labor market is in balance, but this is a 'peculiar balance' caused by a significant slowdown in both labor supply and demand. This abnormal situation suggests that the downside risk to employment is increasing." Regarding inflation, Powell said, "A 'reasonable baseline assumption' is that tariffs will lead to a 'one-time' increase in price levels, but these impacts will take time to fully manifest in the economy."
This statement resonates with previous market speculation regarding the Fed's policy direction. Before Powell's speech, the market had already anticipated a rate cut by the Fed due to recent changes in U.S. economic data. Powell's clear mention of the downside risk to employment and the transitory nature of inflation undoubtedly injected a shot of confidence into the market's rate cut expectations. The Chicago Mercantile Exchange's FedWatch Tool showed that after Powell's speech, market expectations for a rate cut in September soared to nearly 90%.
Reviewing the July U.S. employment report, the performance was shockingly weak, with only 35,000 non-farm jobs added, far below the monthly level of 168,000 expected for 2024, and the employment data for May and June was significantly revised down. This sharp cooling of the labor market has forced the Fed to reassess the direction of monetary policy. Regarding inflation, despite the core PCE price index rising 2.9% year-on-year in July, Powell believes this does not represent persistent inflationary pressure.
The market is focused on key data this week to validate rate cut expectations.
After Powell's speech, the market's focus quickly shifted to a series of key economic data set to be released this week, which will serve as important evidence to verify whether the expectations for a rate cut in September can materialize.
The core PCE inflation data to be released on Friday is highly anticipated. As one of the inflation indicators most closely watched by the Federal Reserve, if the data shows moderate inflation, it will undoubtedly further strengthen market expectations for a rate cut in September. Conversely, if the core PCE inflation data unexpectedly rebounds significantly beyond market expectations, it may impact rate cut expectations, and market optimism regarding a shift in the Fed's monetary policy may also be suppressed.
In addition to inflation data, employment data is equally critical. Given Powell's emphasis on the downside risk to employment in his speech, if the relevant employment data released this week further weakens, such as an unemployment rate increase exceeding expectations, or new job creation far below market estimates, it may be viewed by the market as a strong signal to support the Fed's adoption of accommodative policies, thereby solidifying market confidence in a rate cut in September. Conversely, strong employment data may lead the market to question the necessity of a rate cut by the Fed in the short term.
Additionally, other indicators reflecting economic growth, such as GDP growth rates and manufacturing PMI data, if showing signs of economic slowdown, will also be interpreted by the market as factors supporting a Fed rate cut. After all, in the context of downside risks in the labor market and insufficient economic growth momentum, rate cuts are considered one of the effective means to stimulate the economy and stabilize employment.
From the market reaction, after Powell's speech, all three major U.S. stock indices rose collectively, with the Dow and Nasdaq gaining nearly 2%, and the S&P 500 index rising over 1.5%; the Nasdaq China Golden Dragon Index once rose over 2.5%. The U.S. dollar index suffered significant losses, showing a clear decline, while the two-year U.S. Treasury yield, sensitive to interest rates, fell about 8 basis points to 3.692%; the benchmark ten-year U.S. Treasury yield dropped about 5 basis points to 4.255%. This series of market fluctuations indicates that investors have been adjusting their portfolios based on Powell's speech and expectations for future monetary policy.
However, not everyone is optimistic about a rate cut in September. St. Louis Fed President Alberto M. Musalem stated on the 22nd that current U.S. inflation is above the Fed's 2% target, and the risks in the labor market have not truly materialized. More data support is needed before deciding to support a rate cut in September. She emphasized that as long as inflation remains a threat, there will be hesitation regarding rate cuts.
This week is crucial for the financial markets, as the release of key economic data will significantly influence market expectations for the Federal Reserve's September monetary policy meeting. Whether the Fed will start a rate cut in September as the market currently widely expects, or maintain existing policies due to unexpected data performance, remains uncertain, and all market participants are on high alert, holding their breath for the data to reveal the answer.
Disclaimer: The content of this article is for reference only and does not constitute any investment advice. Investors should rationally consider cryptocurrency investments based on their own risk tolerance and investment objectives and should not blindly follow the trend.
