Federal Reserve Chair Powell's speech at the Jackson Hole global central banking symposium last Friday has been widely interpreted as a clear signal for September rate cuts, instantly igniting market enthusiasm and pushing U.S. stocks to new all-time highs.
However, American economist and Stanford University President Jonathan Levin wrote in a column on Saturday, suggesting that a deeper reading of Powell's Jackson Hole remarks reveals that the core message is not unconditional easing, but rather a difficult balancing act between the dual risks of a weakening labor market and elevated inflation in an economically uncertain environment.
Levin noted that Friday's market euphoria largely overlooked the key nuances in Powell's speech. He emphasized that if the Fed does cut rates, the reason may be that the economy has fallen into trouble, forcing the central bank to intervene, rather than because inflation has cooled. This meaningful underlying context was drowned out by the market's initial reaction.
The article emphasizes that Powell acknowledged in his speech that policymakers face a challenging task of balancing the dual mandate of promoting full employment and maintaining price stability. This policy dilemma suggests that the future rate-cutting path may be slower and more uncertain than market expectations.
**Difficult Choices Under Dual Objectives**
The article points out that when inflation soared to 9.1% in 2022, the Fed's objectives were very clear, and policy consensus was relatively easy to achieve. But now, policymakers face a much more complex situation.
Powell also emphasized in his speech:
"When our objectives are in tension like this, our framework calls for us to balance the two sides of our dual mandate."
Levin explained that on one hand, although unemployment remains low, labor market data has begun to wobble. On the other hand, inflation remains slightly above the Fed's 2% target.
The article cites Powell's remarks that "our policy rate is now 100 basis points closer to neutral than it was a year ago," allowing the Fed to "proceed carefully." However, he simultaneously warned that "monetary policy is not on a preset course."
This policy division has already emerged within the Fed. The July decision to maintain rates at 4.25% to 4.5% drew dissent from two governors, the first such occurrence since 1992, highlighting significant disagreements on how to interpret current economic data.
**Labor Market Downside Risks**
The article emphasizes that behind the market's celebration of rate cuts, a key overlooked point is that the Fed's primary motivation for cutting rates may stem from concerns about economic deterioration.
In Friday's speech, Powell specifically noted that the current labor market is in a "strange equilibrium," where both labor supply and demand have slowed significantly simultaneously, partly due to tightened immigration policies.
Powell was blunt about this:
"This unusual situation suggests that downside risks to employment are rising. Should these risks materialize, they could unfold quickly in the form of sharp increases in layoffs and unemployment."
In other words, rate cuts would be a defensive measure, not a victory declaration of economic strength.
The article notes that other data support this concern. Powell mentioned that U.S. GDP growth in the first half of this year was only about half that of 2024, partly due to slowing consumer spending. This doesn't align with the foundation of the continued stock market bull run.
**Unresolved Inflation Puzzle**
While worrying about the employment market, inflation risks persist.
The article states that many economists continue to worry that Trump's tariff policies will push up commodity prices in the coming months and quarters. Although the current impact appears modest, industry insiders expect that pricing pressure will truly manifest when 2026 model year vehicles hit the market.
How to respond to price shocks from tariffs is itself a hotly debated topic. Doves believe policymakers should ignore such "one-time" price level changes, while hawks worry that against the backdrop of enduring nearly five years of high inflation, this could exacerbate runaway inflation expectations.
Levin believes Powell himself seems to lean toward the "ignore" tariff impact camp, which may be one of the few dovish subtle signals in his speech. However, he simultaneously clearly warned that "we cannot take for granted that inflation expectations will remain well anchored" 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, possibly because investors had widely expected his stance to be more hawkish, leading to position adjustments. The reality is far more mundane, but entirely appropriate for the current economic situation.
Beyond policy challenges, Powell's speech also skillfully avoided political pressure from Trump demanding significant rate cuts. From any angle, Powell's speech showed no signs of yielding to pressure.
Levin stated that based on available data, the Fed appears prepared to cut rates as early as next month and thereafter resume searching for the appropriate interest rate level to support sustainable growth and low inflation. However, the outlook remains highly uncertain, and the policy easing process may be slower than market expectations.
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