Everyone is celebrating the September rate cut—was Powell's speech really that dovish?
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Everyone is celebrating the September rate cut—was Powell's speech really that dovish?
🤔The market's dovish interpretation of Powell's remarks may be somewhat excessive.
Navigating Web3 tides with focused insightsAuthor: Li Xiaoyin, Wall Street Insight
Federal Reserve Chair Powell's speech at the Jackson Hole central bank symposium last Friday was widely interpreted as a clear signal for a rate cut in September, instantly igniting market enthusiasm and sending U.S. stocks to new record highs.
However, Jonathan Levin, an American economist and president of Stanford University, wrote in a Bloomberg column on Saturday that a deeper reading of Powell’s Jackson Hole remarks reveals the core message is not unconditional easing, but rather a difficult balancing act between the twin risks of a weakening labor market and persistently high inflation amid an uncertain economic environment.
Levin said the market’s celebratory reaction on Friday largely overlooked key nuances in Powell’s speech. He emphasized that if the Fed does cut rates, it may be because the economy is running into trouble and the central bank is forced to intervene—not because inflation has cooled. This subtle but significant context was drowned out by the market’s initial response.
The article stresses that Powell acknowledged in his speech that policymakers face a tricky task: balancing their dual mandate of promoting maximum employment and maintaining price stability. This policy dilemma suggests that the path ahead for rate cuts could be slower and more uncertain than markets expect.
A Difficult Choice Under Dual Mandates
The article points out that when inflation surged to 9.1% in 2022, the Fed’s goal was clear and policy consensus relatively easy to achieve. Today, however, policymakers face a far more complex situation.
Powell also emphasized in his speech:
“When our goals are in tension like this, our framework requires us to balance both parts of the dual mandate.”
Levin explains that on one hand, although unemployment remains low, labor market indicators have begun to waver. On the other hand, inflation is still slightly above the Fed’s 2% target.
Citing Powell’s remarks, the article notes, “Our policy rate is now 100 basis points closer to neutral than it was a year ago,” allowing the Fed to “proceed carefully.” Yet he simultaneously warned, “Monetary policy is not on a preset course.”
This policy divergence is already visible within the Fed. The July decision to hold rates steady at 4.25% to 4.5% drew opposition from two governors—a rare occurrence not seen since 1992—highlighting deep disagreements over how to interpret current economic data.
Downturn Risks in the Labor Market
The article emphasizes that behind the market’s cheer for rate cuts lies a critical point being overlooked: the Fed’s primary motivation for cutting rates may stem from concerns about economic deterioration.
In his Friday speech, Powell specifically noted that the labor market is currently in a “strange equilibrium,” where both labor supply and demand are slowing significantly—partly due to tighter immigration policies.
Powell was candid about this:
“This unusual situation suggests downside risks to employment are rising. If these risks materialize, they could emerge quickly in the form of sharp increases in layoffs and a rise in the unemployment rate.”
In other words, a rate cut would be a defensive move, not a victory lap for a strong economy.
The article adds that other data support this concern. Powell noted that U.S. GDP growth in the first half of this year was only about half of what it was in 2024, partly due to slowing consumer spending—a trend inconsistent with the ongoing stock market bull run.
Inflation Challenges Remain Unresolved
While concerns about the job market grow, inflation risks remain.
The article says many economists continue to worry that Trump’s proposed tariff policies could push up goods prices over the coming months or even quarters. Although the impact so far appears mild, industry insiders expect pricing pressure to become evident when 2026 model vehicles hit the market.
How to respond to tariff-driven price shocks is itself a topic of intense debate. Doves argue policymakers should ignore such “one-off” changes in price levels; hawks fear that, after nearly five years of high inflation, this could further destabilize inflation expectations.
Levin believes Powell seems to lean toward the camp that would “look through” tariff effects—perhaps one of the few subtly dovish signals in his speech. Yet he clearly warned, “We cannot take for granted that inflation expectations will remain well anchored,” acknowledging concerns on this front.
Market Reaction May Be Overdone
The article concludes that the market’s dovish interpretation of Powell’s speech may be somewhat exaggerated—or driven by investors who previously expected a much more hawkish stance, leading to position adjustments. The reality is far more subdued, yet entirely appropriate given the current economic landscape.
Beyond policy challenges, Powell’s speech also skillfully sidestepped political pressure from Trump demanding aggressive rate cuts. By any measure, there was no sign in Powell’s remarks of yielding to such pressure.
Levin said that based on current data, the Fed appears ready to cut rates as early as next month, then resume feeling its way toward the appropriate interest rate level that supports sustainable growth and low inflation. But the outlook remains highly uncertain, and the pace of policy easing could be slower than market expectations.
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