Everyone is celebrating the September rate cut. Is Powell's speech really so "dovish"?

Author: Li Xiaoyin, Wall Street Journal

Federal Reserve Chairman Powell's speech at the Jackson Hole symposium last Friday was widely interpreted as a clear signal of a September interest rate cut. This statement instantly ignited market enthusiasm, sending US stocks to new record highs.

However, American economist and Stanford University President Jonathan Levin, writing in a Bloomberg column on Saturday, argued that a deeper analysis of Powell's Jackson Hole speech reveals that its core message was not unconditional easing, but rather the difficult balance between the dual risks of a sluggish labor market and high inflation in a murky economic environment.

Levin stated that the market's frenzied reaction on Friday largely overlooked key nuances in Powell's speech. He emphasized that if the Fed does cut rates, it would likely be because the economy is in trouble, necessitating central bank intervention, rather than because inflation is cooling. This profound background was drowned out by the market's initial reaction. The article emphasized that Powell acknowledged in his speech that policymakers face a daunting task: striking a balance between the dual mandates of promoting full employment and maintaining price stability. This policy dilemma suggests that the path of future interest rate cuts may be slower and more uncertain than the market expects. The article notes that when inflation soared to 9.1% in 2022, the Fed's goals were 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 goals are in tension like this, our framework requires us to balance the two aspects of our dual mandate." Levin explained that, on the one hand, despite the low unemployment rate, labor market data has begun to waver. On the other hand, inflation remains slightly above the Fed's 2% target. The article quoted Powell as saying, "Our policy rate is now 100 basis points closer to neutral than it was a year ago," which allows the Fed to "proceed with caution." However, he also warned that "monetary policy is not set on a predetermined track." This policy disagreement has already become apparent within the Fed. The decision to maintain interest rates at 4.25% to 4.5% in July sparked dissent from two board members, the first time this has happened since 1992 and highlighting the significant disagreement over how to interpret current economic data. The article emphasizes that a key point that has been overlooked behind the market's cheers for the rate cut is that the Fed's primary motivation for the rate cut may stem from concerns about a worsening economy. In his speech on Friday, Powell specifically noted that the current labor market is in a "peculiar equilibrium," with both labor supply and demand slowing significantly, partly due to tightening immigration policies. Powell was blunt: "This unusual situation suggests that downside risks to employment are rising. If these risks materialize, they could manifest quickly in the form of a sharp increase in layoffs and higher unemployment." In other words, a rate cut would be a defensive move rather than a declaration of economic strength. The article points out that other data supports this concern. Powell noted that US GDP growth in the first half of this year was only about half of what it would be in 2024, partly due to slowing consumer spending. This is inconsistent with the foundation for a continued bull market in the stock market. The inflation challenge remains unresolved. Amid concerns about the job market, inflation risks remain. The article states that many economists continue to worry that Trump's tariffs will push up commodity prices in the coming months and even quarters. While the impact is currently mild, industry insiders expect that upward price pressure will truly emerge when new 2026 model-year vehicles hit the market. How to respond to the price shocks posed by tariffs is itself a hotly debated topic. Doves argue that policymakers should ignore this "one-off" change in price levels, while hawks worry that it could exacerbate runaway inflation expectations amid nearly five years of high inflation. Levin believes that Powell himself seemed to lean toward the camp of "ignoring" the impact of tariffs, which may be one of the few subtle dovish signals in his speech. However, he also explicitly warned that "we cannot take for granted that inflation expectations will remain stable," and acknowledged these concerns. The article concludes by emphasizing that the market's dovish interpretation of Powell's speech may be somewhat exaggerated, perhaps due to widespread investor expectations of a more hawkish stance, which led to a position adjustment. The reality was far more tame, but entirely appropriate for the current economic situation. Beyond the policy challenges, Powell's speech deftly avoided political pressure from Trump to drastically cut interest rates. By any measure, Powell's speech showed no sign of yielding to pressure. Levin stated that based on available data, the Fed appears poised to cut interest rates as early as next month and then resume its exploration of the appropriate interest rate level to support sustainable growth and low inflation. However, the outlook remains highly uncertain, and the pace of policy easing may be slower than the market anticipates.