Last Friday, Federal Reserve Chairman Powell's speech at the Jackson Hole Global Central Bank Annual Meeting was widely seen as a clear signal for a rate cut in September, instantly igniting market enthusiasm, with U.S. stocks hitting new highs. However, Jonathan Levin, an economist and president of Stanford University, pointed out in a Bloomberg column on Saturday that a deep analysis of Powell's speech reveals that its core was not unconditional easing, but rather a difficult weighing of the dual risks of a sluggish labor market and high inflation in a complex economic environment.
The difficult choice under dual objectives
When the inflation rate surged to 9.1% in 2022, the Federal Reserve's goals were clear, and policy consensus was easy to reach. However, policymakers now face a more complex situation.
In his speech, Powell emphasized: 'When our goals are under such tension, our framework requires us to balance the two aspects of our dual mission.' Levin explained that, on one hand, although the unemployment rate is low, labor market data has already been shaken; on the other hand, the inflation rate remains slightly above the Federal Reserve's 2% target.
Powell stated, 'Our policy rate is now 100 basis points closer to neutral than it was a year ago,' and the Federal Reserve can 'proceed cautiously,' but he also warned that 'monetary policy is not set on a predetermined path.' This policy divergence has already emerged within the Federal Reserve, as the decision to maintain interest rates between 4.25% and 4.5% in July sparked opposition from two board members, the first such occurrence since 1992, highlighting the huge differences in interpreting economic data.
Downside risks in the labor market
Behind the market's cheer for a rate cut lies a key point that has been overlooked: the Federal Reserve's rate cut may stem from concerns about economic deterioration.
Powell pointed out in his speech that the current labor market is in a 'strange balance,' with both labor supply and demand significantly slowing, partly due to tightened immigration policies. He candidly stated, 'This unusual situation indicates that the downside risks for employment are rising. If these risks materialize, they could quickly manifest as sharp increases in layoffs and rising unemployment rates.'
A rate cut will be a defensive measure, rather than a declaration of economic strength. Supporting this concern is data showing that the U.S. GDP growth rate in the first half of this year was only about half of what is expected in 2024, partly due to a slowdown in consumer spending, which is inconsistent with the foundation of the ongoing bull market.
The inflation dilemma remains unresolved
Inflation risks still exist amidst concerns about the job market.
Many economists are concerned that the tariff policies implemented by Trump will drive up commodity prices in the coming months and even quarters. Currently, the impact is mild, but industry insiders expect that the pressure on prices will become evident when the 2026 model cars hit the market.
How to respond to the price shocks brought by tariffs is a topic of intense debate. Doves believe that decision-makers should ignore the 'one-time' changes in price levels; hawks worry that, after enduring high inflation for nearly five years, this could exacerbate runaway inflation expectations.
Levin believes that Powell tends to belong to the camp that 'ignores' the impact of tariffs, which may be one of the rare dovish nuances in his speech. But he also warned, 'We cannot take for granted that inflation expectations will remain stable,' acknowledging concerns in this area.
Market reactions may be excessive
The article concludes by emphasizing that the market's dovish interpretation of Powell's speech may be excessive, perhaps because investors had previously expected his stance to be more hawkish, leading to position adjustments. The actual situation is dull yet appropriate.
Beyond policy challenges, Powell's speech cleverly avoided the political pressure from Trump to significantly cut rates, showing no signs of yielding.
Levin stated that based on existing data, the Federal Reserve may cut rates as early as next month and then resume exploring appropriate interest rate levels that support sustainable growth and low inflation. However, the outlook is highly uncertain, and the process of policy easing may be slower than the market expects.
