Federal Reserve (Fed) Chair Jerome Powell’s speech at Jackson Hole was the event of the week and with good reason, as investors expected it to signal the direction of monetary policy over the coming months, especially whether the Fed would hold or cut rates at their next meeting in September. And it does at least seem like Powell is ready to cut rates.
Powell did note that risks to inflation are tilted to the upside, but also noted that risks to employment are tilted to the downside. This is challenging given the Fed must balance both sides of its mandate (stable inflation and maximum employment). But here’s the key: Powell also pointed out that policy rates are in restrictive territory and that means “the shifting balance of risks may warrant adjusting our policy stance” (quoting directly from his speech). This is dovish on balance and markets ran with it, with the S&P 500 surging 1.5% on Friday after the speech.
Market expectations in short:
- A rate cut in September is likely, but it’s not a certainty.
- The path ahead is very uncertain, and this is not a signal that even a September cut is the beginning of a series of cuts.
A Long-Term Dovish Posture = Bullish for Markets
Something to remember is that the US president is also inclined to shape the Federal Reserve in such a way so that they pursue lower interest rates and run the economy (and inflation) hot. Add to this, deficit-financed tax cuts that will not entirely be offset by tariffs. And with all this, inflation may not go back to the Fed’s 2% target for a long time, unless with a deflationary recession.
Time will tell…
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