Quick Bite – Powell’s Jackson Hole in One
Long one of the year’s key global economic events, the annual symposium in Jackson Hole has taken on even greater importance over the last several years: The last Fed rate cut was in December 2024 — 8 months ago — and investors were eagerly anticipating signals that the Fed is ready to resume monetary policy easing.
With expectations running high that September will mark the restart, investors were placing even more emphasis on Fed Chair Powell’s speech last Friday. And the news was clear from the start: the speech delivered precisely what the market wanted to hear.
Source: FT
What did Fed Chair Powell’s speech reveal about potential policy easing?
Powell’s speech noted that the “baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” with an emphasis on the downside risks to the jobs market. He highlighted not only a slowdown in labour demand, which was evident in the weak July payrolls report, but also a marked slowdown in the supply of labour due to tighter immigration policies.
At the same time, however, he struck a balance by noting the risk of inflation and reaffirming the Fed’s resolve to prevent inflation from becoming entrenched. That said, the consensus opinion is that Powell left the door wide open for a rate cut at the September 16-17 meeting, though stopping short of committing to one.
Notably, Powell observed that tariff-related inflation impacts would likely be short-lived, though he is mindful that high tariffs may lead to higher and stickier prices, as they represent a one-time shift in price levels. He also noted that, to assess whether tariff-related inflationary pressures remain, he will focus on wage inflation and inflation expectations, both of which are well-contained for now.
The labour market is no longer out of balance, or tight, which should alleviate any persistent inflation through the wage channel. And despite running well above the Fed’s 2% inflation target, longer-term inflation expectations are well-anchored, signalling that the market continues to believe the Fed will be successful in ultimately taming inflation.
Powell’s Jackson Hole speech was consistent with forecasts for a rate cut the September FOMC meeting, and forecasts for a further 2x25bp rate cuts in 2025.
Markets expect global central banks to lower policy rates from an average 3.5% to 2.9% on a GDP-weighted basis over the next four quarters – according to Goldman Sachs.
Dow Jones hits new high in wake of speech
Source: Yahoo Finance
Shift in tone
Powell’s tone on Friday marked a notable shift from his Jackson Hole speech one year earlier, when he declared more emphatically that “the time has come for policy to adjust” and said, “the direction of travel is clear.”
The difference reflects the Fed’s more precarious position: Interest rates are a full percentage point lower than they were one year ago, and inflation is running higher. The more measured approach suggests mortgage rates and other borrowing costs are unlikely to fall sharply unless the labour market weakens significantly.
