Last Friday, Federal Reserve Chairman Powell's speech at the Jackson Hole Global Central Banking Conference was widely interpreted by the market as a strong signal for a rate cut in September, leading to a surge in optimistic sentiment and U.S. stocks reaching historic peaks.
However, American economist and Stanford University President Jonathan Levin expressed a different view in a Bloomberg column on Saturday. He believes that the market seems to overlook the subtle wording and cautious balancing in Powell's speech. Levin pointed out that the true message Powell conveyed is not an unconditional commitment to easing but the challenging balance of the dual risks of a weak labor market and persistently high inflation in an uncertain economic outlook.
The market, immersed in the euphoria brought by expectations of interest rate cuts, may be overlooking a key point: if the Federal Reserve really decides to cut rates, it might not be because inflation has been brought under control, but because the economy is showing signs of weakness, forcing the central bank to step in to support it. This layer of 'defensive rate cut' meaning has been obscured by short-term market sentiment.
Powell also admitted in his speech that the Federal Reserve is facing an extremely complex task—finding a balance between achieving full employment and maintaining price stability, two goals that sometimes conflict with each other. This policy dilemma means that even if entering a rate-cutting cycle, the path may be more cautious and uncertain than many expect.
Difficult trade-offs under the dual mandate
Looking back at the inflation spike to 9.1% in 2022, the Fed's policy goals were very clear, and consensus was easier to reach. Now, the situation is very different.
Powell specifically emphasized: 'When our two goals are in such a state of tension, the policy framework requires us to weigh both sides of the risks simultaneously.' On one hand, although the unemployment rate is still low, certain indicators in the labor market have begun to loosen; on the other hand, inflation, while receding, is still above the 2% policy target.
Powell mentioned, 'The current policy rate is closer to neutral than it was a year ago,' which gives the Fed some 'room for caution.' But he also clearly reminded that 'monetary policy is not on a predetermined path.'
This internal division was evident in the July interest rate decision—two board members voted against keeping interest rates unchanged, marking the first such policy division within the Fed since 1992, highlighting the difficulty of data interpretation and the significant differences in positions.
Labor market: Hidden downside risks
The market cheers for 'rate cuts,' but may not realize: rate cuts are not necessarily good news, but could instead be a warning for the economy.
Powell pointed out in his speech that the current labor market is in a state of 'unusual balance'—both the supply and demand for labor are slowing down, partly due to tightening immigration policies. He did not shy away from warning: 'This special situation means that the downside risks to employment are rising. Once these risks become a reality, they could suddenly erupt in the form of a surge in layoffs and a rapid rise in the unemployment rate.'
In other words, cutting interest rates is more like a preventive medicine rather than a declaration of a strong economy.
Some data also supports this hidden concern. Powell mentioned that the U.S. GDP growth rate in the first half of this year was only about half of that in the same period of 2023, and consumer spending has shown signs of weakness—this does not completely align with the 'prosperity narrative' where the stock market is repeatedly hitting new highs.
Inflation: Still an unresolved issue
While risks in the job market are emerging, inflation has not completely retreated.
Levin wrote in the article that many economists continue to worry that the tariff policies implemented by the Trump administration may push up commodity prices in the coming quarters. Although the impact is currently limited, some forecasts indicate that significant price pressure may be concentrated when new car models are launched in 2026.
How should we respond to the price shocks brought about by tariffs? There is intense debate within the Federal Reserve. Doves believe that price changes caused by such 'one-time factors' can be ignored; while hawks are concerned that, in the context of the public having endured high inflation for several years, this could likely push inflation expectations up again.
From Powell's statements, he seems to be more inclined to 'ignore' the impacts of tariffs—this may be one of the few dovish details in his speech. But he also emphasized seriously, 'We cannot take for granted that inflation expectations will always remain stable,' suggesting that the central bank has not relaxed its vigilance.
The market may have gotten excited too early
Levin reminded at the end of the article that the market's dovish interpretation of Powell's speech might be somewhat excessive. A possibility closer to the truth is that investors previously generally expected Powell to be tougher, and the speech content was not as 'hawkish' as expected, leading to a rebound in position adjustments. The real information is far more calm and complex than the market's first reaction.
Additionally, Powell's speech cleverly sidestepped the political pressure for rate cuts from Trump. From the overall tone, he did not yield to external calls and maintained policy independence.
In summary, the Federal Reserve may indeed cut rates in September, but it will cautiously explore an appropriate interest rate path that can support growth while keeping inflation in check. The outlook remains highly uncertain, and the pace of easing may be slower than the market currently expects.
I am Xiao O, a professional analyst and teacher, a mentor and friend on your investment journey! As an analyst, the most basic thing is to help everyone make money. To solve your confusion, to avoid losses, and to speak with strength. When you are lost and don't know what to do, follow Xiao O, and I will guide you in the right direction.
\u003cc-56/\u003e\u003cc-57/\u003e
\u003ct-76/\u003e\u003ct-77/\u003e
