Powell sends the strongest rate cut signal so far, the timing for policy adjustment has arrived

Federal Reserve Chairman Powell conveyed a clear message to the market in a significant speech on Friday, stating that "the time for rate cuts has come."

According to the Wise Finance app, Powell stated at the Federal Reserve's annual symposium in Jackson Hole, Wyoming, "The time for policy adjustments has come. The direction forward is clear, and the timing and pace of rate cuts will depend on upcoming data, evolving outlook, and risk balance."

Powell's speech comes more than three weeks before the Federal Reserve's meeting on September 17-18, when the Fed may announce its first rate cut since 2020. In his speech, Powell acknowledged the recent weakness in the labor market and stated that the Fed does not want to further cool labor market conditions.

The July employment report released earlier this month shocked the market, with data showing that the U.S. economy added only 114,000 jobs last month, while the unemployment rate rose to 4.3%, the highest level since October 2021. Meanwhile, data earlier this week showed that as of March, there were 818,000 fewer employed people in the U.S. economy than in previous reports, indicating that the labor market conditions over the past year may have been overestimated.

Powell stated, "The labor market does not appear to be a source of inflationary pressure in the short term." Prior to Powell's speech, investors had almost fully anticipated a rate cut by the Fed next month, with the market betting that the probability of a 25 basis point rate cut is about twice as high as a 50 basis point rate cut.

He said, "Four and a half years after the outbreak of the COVID-19 pandemic, pandemic-related economic distortions are gradually fading. Inflation has significantly declined... Our goal is to restore price stability while maintaining a strong labor market and avoiding the sharp rise in unemployment rates during periods of unstable inflation expectations. Although the task is not yet fully completed, we have made significant progress in achieving this goal."

At the 2022 Jackson Hole conference, Powell directly assessed the economic outlook and emphasized the need for further rate hikes.

He recalled, "Two years ago on this stage, I discussed the pain that could come from addressing inflation, such as higher unemployment rates and slower economic growth. Some believed that controlling inflation would require experiencing a recession and prolonged high unemployment rates. I expressed our unconditional commitment to fully restore price stability and will continue to do so until the task is completed."

Friday's speech indicated that this task is actually nearing completion.

Powell concluded, "Overall, the recovery from the pandemic, our efforts to restrain aggregate demand, and the anchoring of expectations have together put inflation on what appears to be a sustainable path towards our 2% target."

With expectations almost confirming a rate cut by the Fed next month, the US dollar plummeted, triggering a rebound in major global currencies. The Bloomberg Dollar Index fell by 1%, hitting its lowest level since January this year, and the dollar index is set to fall for the fourth consecutive week, marking the longest decline since April 2023. Jane Foley, head of foreign exchange strategy at Rabobank in London, said, "Powell made it clear that the Fed's focus has shifted from inflation to balancing its dual mandate." She added, "This speech did not object to the possibility of a larger-scale Fed rate cut in September After Powell's speech, the probability of a 50 basis point rate cut by the Fed in September has increased. The probability of a 25 basis point rate cut in September is 67.5%, while the probability of a 50 basis point rate cut is 32.5%. The probability of a cumulative 50 basis point rate cut by November is 43%, a cumulative 75 basis point rate cut is 45.2%, and a cumulative 100 basis point rate cut is 11.8%.

Journalist Nick Timiraos, known as the "Fed Whisperer," posted on social media that today's speech indicates Powell's policy shift is complete. Powell demonstrated a fully dovish stance in the speech, whereas two years ago during the same period, he indicated that the Fed would accept an economic downturn as the cost of restoring inflation.

Steve Englander, Global Head of FX Research and Macro Strategy at Standard Chartered Bank, stated that the market's reaction, with the weakening of the US dollar and a slight decline in bond yields, is broadly correct. Powell did not say, "Yes, we are going to start an easing cycle with three 50 basis point rate cuts." What he did was to emphasize the fact that the inflation target is within reach. They are concerned about the labor market, saying that the labor market does not need to weaken further. Therefore, without providing a timetable, these remarks imply that the door has been opened to a 50 basis point rate cut at some point. We still do not believe that a 50 basis point rate cut is the first move, but if the labor market continues to weaken, it may come soon.

Economists at Bank of America pointed out that the Fed's focus on cooling the US labor market still requires a 25 basis point rate cut in September, not 50 basis points. Bank of America stated that despite Powell's dovish tone, "we do not believe he has opened the door for a 50 basis point rate cut." "On the contrary, he subtly supports a gradual reduction in interest rates." If the risk of an economic downturn increases, a more significant cut will occur. "A very weak employment report could help us achieve this goal, but the decline in initial jobless claims suggests that this should not be the case."