Powell Turns Dovish! Paving the Way Cautiously for a September Rate Cut, Warns of Increasing Downside Risks in the Labor Market

On August 22 local time, Federal Reserve Chair Jerome Powell spoke at the Jackson Hole Economic Symposium in Wyoming, USA. He emphasized that although inflation risks persist, weakness in the job market is becoming a key variable in policy considerations, opening the possibility of a rate cut in September.

Markets interpreted his stance as more dovish than expected, leading to a drop in U.S. Treasury yields, a decline in the U.S. dollar, and further gains in U.S. stocks. According to CME Group's FedWatch data, market bets on a 25-basis-point rate cut by the Fed in September rose to 89%, up significantly from 75% the previous day. Expectations for the cumulative rate cuts this year also increased to approximately 58 basis points.

In his speech, Powell stated that the U.S. labor market is in an "unusual balance," resulting from a simultaneous slowdown in both labor supply and demand. He noted, "While the labor market appears balanced, this balance is peculiar because it stems from a significant slowdown on both the supply and demand sides of labor."

He specifically mentioned the revision of July employment data, which showed that job growth was far lower than previously reported. "This anomaly suggests that downside risks to employment are rising. If these risks materialize, they could quickly manifest as a surge in layoffs and an increase in the unemployment rate," Powell said.

A report previously released by the U.S. Labor Department showed that nonfarm payrolls increased by 73,000 in July, well below market expectations of 115,000. Job gains for May and June were also revised down significantly by 258,000 compared to earlier data.

Powell also cautioned that policy adjustments must be made carefully. "As we consider changes to the policy stance, the stability of the unemployment rate and other labor market indicators allows us to proceed cautiously. However, changes in the baseline outlook and risk balance may make adjusting the policy stance appropriate."

Powell did not shy away from addressing the persistence of inflation. He stated, "The impact of tariffs on consumer prices is now clearly visible, but it is reasonable to expect these effects to be relatively short-lived. Nevertheless, the upward pressure on prices from tariffs could also trigger more persistent inflationary dynamics, which is a risk that needs to be assessed and managed."

He emphasized that when the Fed faces a tug-of-war between "inflation and employment goals," "our policy framework requires us to seek a balance between the two aspects of our dual mandate."