-
Unexpected Shift in Powell’s Speech
At the Jackson Hole Conference on August 22, Federal Reserve Chair Powell explicitly indicated a rate cut in September, exceeding market expectations. Previously, the market had already priced in a 90% probability of a September rate cut, but Powell’s clear statement further solidified this expectation, triggering sharp market reactions: the U.S. dollar index plummeted, gold and Bitcoin prices surged, and the S&P 500 and Nasdaq indices rose by 1.2% and 1.5%, respectively.
In his speech, Powell acknowledged downside risks in the labor market, noting that revised employment data over the past few months showed an average monthly job gain of only 37,000, far below expectations. Additionally, the inflation rate has largely stagnated at around 3% over the past year, failing to move closer to the 2% target. Upcoming tariff policies may further push up prices, increasing the risk of inflation expectations becoming unanchored.
-
Adjustment of Monetary Policy Framework
The Federal Reserve reviews its monetary policy framework every five years, and the 2025 adjustment represents a significant revision to the 2020 policy. In 2020, the Fed introduced the "Flexible Average Inflation Targeting" (FAIT) framework, allowing inflation to overshoot when below 2% to compensate for periods of low inflation. However, the high inflation following the COVID-19 pandemic exposed the limitations of this framework. Powell openly admitted the policy mistakes of 2020, demonstrating humility and reflective capability as a policymaker.
The new framework marks a return to tradition, eliminating the asymmetric inflation target and reemphasizing a strict 2% goal. It also reinstates the practice of preemptive rate hikes when unemployment is too low. This adjustment reflects the Fed’s renewed understanding of the high-inflation environment, aiming to avoid a wage-price spiral or unanchored inflation expectations.
-
Market and Political Pressures
Powell’s decision to cut rates may have been influenced by multiple pressures, including dovish voices within the FOMC (such as Waller) and external political pressures. Trump’s public criticism of the Fed and his potential interference in monetary policy (e.g., the mortgage controversy involving Fed Governor Lisa Cook) further complicated the policy environment. If Trump appoints more FOMC members in the future, the Fed’s independence could face challenges.
