Everyone is celebrating the interest rate cut in September. Was Powell's speech really that "dovish"?

Last Friday, Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole Global Central Bank Annual Meeting was widely interpreted as a clear signal for a rate cut in September, instantly igniting market enthusiasm and leading U.S. stocks to set new historical highs. However, American economist and Stanford University President Jonathan Levin wrote in a Bloomberg column on Saturday that a deeper interpretation of Powell's speech at Jackson Hole reveals that its core message is not unconditional easing, but rather a difficult balancing act between the sluggish labor market and high inflation in a foggy economic environment. Levin stated that the market's euphoric reaction on Friday largely overlooked the key subtleties in Powell's remarks. He emphasized that if the Federal Reserve does indeed cut rates, it may be because the economy is in trouble and the central bank has to intervene, rather than due to cooling inflation. This significant context was drowned out by the market's initial response. The article stressed that Powell admitted in his speech that decision-makers are facing a tricky task of balancing the dual mandate of promoting full employment and maintaining price stability. This policy dilemma suggests that the future path of rate cuts may be slower and more uncertain than the market expects. Difficult Choices Under Dual Mandates The article pointed out that when inflation soared to 9.1% in 2022, the Federal Reserve's goals were very clear, and policy consensus was relatively easy to achieve. However, the situation policymakers face now is much more complex. 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 one hand, although the unemployment rate is low, labor market data has begun to wobble. On the other hand, inflation remains slightly above the Federal Reserve's 2% target. The article cited Powell's remarks stating, "Our policy rate is now 100 basis points closer to neutral than it was a year ago," which allows the Federal Reserve to "proceed cautiously." But he also warned that "monetary policy is not set on a predetermined path." This policy divergence has already manifested within the Federal Reserve. The decision to maintain interest rates at 4.25% to 4.5% in July faced opposition from two board members, marking the first occurrence of such dissent since 1992, highlighting significant differences in interpreting current economic data. Downside Risks in the Labor Market The article emphasized that behind the market's cheers for a rate cut lies a key point that has been overlooked: the primary motivation for the Federal Reserve to cut rates may stem from concerns about economic deterioration. In his speech on Friday, Powell specifically pointed out that the current labor market is in a "peculiar balance," with both labor supply and demand significantly slowing, partly due to tightening immigration policies. Powell candidly stated: "This unusual situation indicates that the downside risks to employment are rising. If these risks materialize, they could quickly manifest in the form of a sharp increase in layoffs and rising unemployment rates." In other words, interest rate cuts will be a defensive measure rather than a triumphant declaration of a strong economy. The article points out that other data supports this concern. Powell mentioned that the GDP growth rate in the United States in the first half of this year was only about half of that expected for 2024, partly due to a slowdown in consumer spending. This does not align with the fundamentals of a sustained bull market in the stock market. The Inflation Dilemma Remains Unresolved While there are concerns about the labor market, inflation risks still persist. The article states that many economists continue to worry that the tariff policies implemented by Trump will drive up commodity prices in the coming months and even quarters. Although the current impact appears mild, industry insiders expect that when new cars for 2026 hit the market, the pressure for price increases will become evident. How to respond to the price shocks caused by tariffs is itself a fiercely debated topic. Doves believe that decision-makers should ignore these "one-time" changes in price levels; while hawks worry that, after enduring nearly five years of high inflation, this could exacerbate the loss of control over inflation expectations. Levin believes that Powell himself seems to lean towards the camp that "ignores" the impact of tariffs, which may be one of the few dovish nuances in his remarks. However, he also clearly warns, "We cannot take for granted that inflation expectations will remain stable," acknowledging concerns in this area. Market Reactions May Be Overdone The article concludes by emphasizing that the market's dovish interpretation of Powell's remarks may be somewhat exaggerated, or it may be due to investors' prior expectations that his stance would be more hawkish, leading to position adjustments. The actual situation is much more subdued, but entirely appropriate for the current economic landscape. Beyond policy challenges, Powell's remarks also cleverly sidestepped the political pressure from Trump to significantly cut interest rates. From any angle, Powell's remarks showed no signs of yielding to pressure. Levin states that based on existing data, the Federal Reserve appears ready to cut rates as early as next month and subsequently explore appropriate interest rate levels to support sustainable growth and low inflation. However, the outlook remains highly uncertain, and the process of policy easing may be slower than the market expects.