Powell Delivers Speech at Jackson Hole Symposium
"Shifting Risk Balance... Downside Risks to Employment Grow"
New York Stocks Rise Nearly 2%... 90% Odds for September Rate Cut
Jerome Powell, Chair of the US Federal Reserve (Fed), mentioned the recent slowdown in employment and stated on the 22nd (local time), "We may need to adjust our policy stance." Having previously emphasized the risks of rising inflation and maintained a cautious monetary policy, he has now effectively signaled the possibility of a rate cut. The market is increasingly anticipating a rate cut in September.
At the Jackson Hole meeting, the annual economic policy symposium held in Wyoming, Powell said, "Policy remains in restrictive territory, and if our baseline outlook or the balance of risks changes, we may need to adjust our policy stance." He added, "Based on the stability of the unemployment rate and other labor market indicators, we can carefully consider changes to our policy stance."
This statement suggests that the Fed, which has so far focused on curbing inflation, could shift its policy stance to place greater weight on the risks of employment slowdown going forward. In effect, it leaves open the possibility of a rate cut in September.
Powell cited the increasing downside risks in the labor market as the basis for his remarks.
He said, "Overall, the labor market appears to be in balance, but this is a peculiar equilibrium resulting from a significant slowdown in both labor demand and supply," and assessed, "Such an unusual situation indicates that downside risks in the job market are increasing." He went on to warn, "If these risks materialize, it could lead to a sharp rise in layoffs and an increase in the unemployment rate."
As a sign of the recent labor market slowdown, he referred to the July employment report released on the 1st. According to the report, nonfarm payrolls in July increased by only 73,000, falling well short of the forecast of 106,000. The employment gains for May and June were also significantly revised downward to 19,000 and 14,000, respectively, compared to the previously announced figures of 144,000 and 147,000.
However, Powell emphasized that inflation risks stemming from tariff policies still remain.
He stated, "The basic scenario is that price increases from tariffs will be a one-off event," but also cautioned, "There is a possibility that new inflation dynamics could emerge, causing price pressures to persist longer." He further explained, "It takes time for tariff increases to impact supply and distribution chains, and as tariff rates continue to change, the adjustment process could be prolonged."
He continued, "These are risks we must assess and manage," stressing the need to maintain a balance between the dual mandates of price stability and full employment.
Powell also stated, "FOMC members will make decisions solely based on data, economic outlook, and assessments of the balance of risks," adding, "We will never deviate from this approach." This is interpreted as an indirect expression of his determination to uphold the central bank's independence amid mounting pressure from President Donald Trump to cut rates.
With Powell signaling a rate cut through more dovish-than-expected remarks, market expectations for monetary easing have grown further. His comments stand in contrast to the July Federal Open Market Committee (FOMC) minutes, which stated, "The majority judged rising inflation as the greater risk." It is suggested that the July employment report released right after last month's FOMC may have led to a shift in sentiment within the Fed.
According to CME FedWatch, the federal funds rate futures market on this day reflected a 91.1% probability that the Fed will cut rates by 0.25 percentage points in September, up sharply from 75% the previous day. The probability of a total 0.75 percentage point rate cut across all three remaining FOMC meetings this year jumped from 25.4% to 38.9%.
The financial markets also cheered. The three major New York stock indexes are up by around 2%, and US Treasury yields have plunged by about 10 basis points (1bp=0.01%). The yield on the benchmark 10-year US Treasury note is at 4.24%, while the yield on the 2-year note, which is sensitive to monetary policy, is at 3.68%, down 8bp and 10bp respectively from the previous trading day.
However, the inflation and employment data for August, which will be released before the September FOMC, could be a variable.
Jay Hatfield, founder of Infrastructure Capital Management LLC, said, "Because the Fed chair has always lagged behind in recognizing clear economic trends, his remarks today provided significant relief to the market," adding, "We expected the Fed to cut rates two to three times this year due to labor market weakness." He assessed, "Powell has finally acknowledged the clear economic slowdown and laid the groundwork for a rate cut in September."
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