The Fed I: Markets Hear Powell Cooing.
We expected Fed Chair Jerome Powell to sound neither dovish nor hawkish when he spoke at the Fed’s Jackson Hole Symposium on Friday. We expected him to be owlish, expressing the need to wait and watch for further data before committing to another round of monetary policy easing. The financial markets expected that he would be dovish, and they were right, sort of. Investors have believed that a Fed rate cut is likely in September ever since the weaker-than-expected July employment report. We’ve been pushing against this scenario. Powell did not push against it. He did not try to reset expectations. So that made the markets even more convinced that a rate cut is coming.
In previous discussions of monetary policy this year, Powell repeatedly said that the Fed is in no hurry to lower interest rates. He didn’t say that on Friday. The sentence in Powell’s speech that fueled Friday’s big stock market rally was the following: “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” In other words, the FOMC might cut the federal funds rate at the September meeting.
Needless to say, Powell included lots of hedge clauses in his speech. Immediately after he threw more gasoline on the stock market’s meltup, he noted: “Monetary policy is not on a preset course. FOMC members will make these decisions based solely on their assessment of the data and its implications for the economic outlook and the balance of risks. We will never deviate from that approach.” Those were his concluding remarks on the near-term outlook for monetary policy, which remains data dependent.
Powell did not mention that before the next FOMC meeting in September, there will be two important inflation indicators and another employment report. Presumably, the FOMC’s decision in September will depend on these data points. We continue to think they could confirm that inflation remains stuck around 3.0%—a full percentage point above the Fed’s 2.0% inflation target. We are also anticipating that payroll employment rose 100,000 in August. That would be an increase from 73,000 in July (which likely will be revised) and confirm our view that the weakness in payroll gains during May and June was attributable to Trump’s Tariff Turmoil, which has abated since then.
Powell did discuss the current employment and inflation situations:
