First, clarify the 'factual basis'. On August 22 at 16:00 CEST, Powell delivered a speech at Jackson Hole (Economic Outlook and Framework Review). He used two key phrases: first, the labor market is in a 'strange balance' (both supply and demand are slowing); second, 'the downside risk to employment is rising', which if realized will 'quickly reflect as layoffs and rising unemployment rates'. This shifts the focus from 'focusing solely on inflation' to 'weighing the two harms', opening the door for subsequent adjustments.
The market's immediate reaction was direct: after the speech, the major U.S. stock indices rose more than 1.5%, with small-cap stocks performing even stronger; U.S. Treasury yields fell, and the dollar weakened. Reuters and several financial media interpreted this statement as 'leaving the door open for a rate cut in September', and the rate cut probabilities in the futures market were quickly adjusted upward. Gold also shifted from hesitation during the day to an upward trend, briefly rising about 1%, coinciding with the dollar index's decline.
How do I interpret this? This is a 'conditional dovish turn', not 'unconditional easing'. Three key signals:
1) The wording places 'the risk balance is changing' on the table and thoroughly discusses 'the speed risk of employment deterioration' — if the employment gap widens, policy will respond faster; conversely, if inflation remains sticky, the pace of easing will slow down.
2) The framework review is advancing simultaneously. The Federal Reserve has released supporting materials for the framework review, acknowledging that the 2020 version is more suitable for the pre-pandemic environment, and that there is currently a need for a toolbox with variable pacing. This lowers the threshold of 'having to wait until all data is complete before taking action.'
3) The 'reflexivity' of asset prices has returned: stocks, bonds, currencies, and commodities responded in the same direction, indicating that funds view this speech as a 'prelude' to a turning point rather than a 'final decision'. If subsequent data does not cooperate, the pullback will also be faster.
Where is the point of divergence?
— Divergence One: Is a rate cut in September certain? I do not believe it is 'set in stone'. Powell still emphasizes that inflation is above target and has pointed to the 'uncertainty' of supply-side shocks such as tariffs. This means the Federal Reserve is more willing to 'accelerate only if data falsifies' rather than preset the pace.
— Divergence Two: Can the direction of the dollar and gold continue? Many reports before the market open were still saying 'gold prices are suppressed by a strong dollar', but after the speech, the trend reversed, indicating that the variable lies in 'policy expectations', not in the fundamentals of a single commodity. If subsequent PCE or employment exceeds expectations, the dollar may rebound and gold prices will retract.
— Divergence Three: The transmission of cryptocurrency. Historically, 'interest rate cut expectations ↑ → liquidity preference ↑' often benefits high-beta assets, but now regulation and ETF funds are also being priced in, so we cannot only look at the macro. My baseline is: if the dollar continues to weaken + U.S. Treasury yields decline, the elasticity of leading cryptocurrencies will be greater; if the dollar rebounds, first, high leverage and themes will be killed.
My deduction:
If the PCE on 8/29 and September employment show 'moderate inflation + weakening employment', the probability of a slight rate cut (25bp) in September is higher, and risk assets and gold will continue to benefit, with the dollar remaining weak.
If inflation stickiness resurfaces or wages rise again, the Federal Reserve will keep the 'risk balance shift' at the verbal level, and the market will need to reprice: a combination of stock index retraction, gold cooling, and dollar rebound is more likely to occur.
Regardless, the framework review has written 'more flexible objective functions' into the consensus, and future communications will emphasize the bilateral risks of 'employment-inflation' rather than unilateral anti-inflation.