Exposed, Powell may now be just a "dove"!

Last week, at the Federal Reserve's annual research symposium held in Jackson Hole, Wyoming, a few policymakers put forward reasons for lowering interest rates in a "gradual" or "orderly" manner. This is contrary to investors' expectations of at least a significant rate cut by the Federal Reserve this autumn.

Brett Ryan, a senior U.S. economist at Deutsche Bank, said, "Orderly, gradual, cautious—these are all words that policymakers often use when changing course. This will be an exploratory process, and they hope to take a slow approach."

During the financial crisis and the COVID-19 pandemic, policymakers quickly lowered interest rates to zero. Former Fed Chairman Volcker was known for his firm strategy to suppress inflation in the late 1970s and early 1980s. In addition, the Fed typically adjusts its monetary policy by only 25 basis points each time.

After underestimating the surge in prices in 2021 and tightening policy too late, some policymakers remain vigilant about reigniting inflation. At least one policymaker is concerned that lower borrowing costs will unleash demand from consumers and businesses that have been suppressed waiting for lower rates.

However, at the same time, the labor market is finally starting to return to normal, albeit somewhat weak in some aspects. The unemployment rate unexpectedly rose to 4.3% in July. Employers have not laid off workers on a large scale, but their hiring pace has slowed significantly.

To some, such as Richmond Fed President Barkin, this situation is unlikely to last long.

Claudia Sahm, Chief Economist at New Century Advisors, said, "Regarding the weakness in the labor market, they are now facing a major issue. They need to start lifting restrictions."

Powell and his colleagues have long believed that a hot job market drives wage growth, giving American consumers greater spending power, thereby stimulating inflation. But Powell made it clear that this effect has disappeared.

EY's Patnaik economists Gregory Daco and Lydia Boussour said, "Powell appears to be more dovish than his peers. Nevertheless, unless there is substantial deterioration in the labor market in the coming weeks, we still expect most policymakers to support a 25-basis-point rate cut in September."

In the past 20 years, the Fed has only cut rates by 50 basis points or more before or during an economic recession.

Where is the endpoint of rate cuts?

As Fed officials begin the next phase of their work, they face another question besides the pace of rate cuts: if all goes well, how far can rates ultimately be cut? This involves the so-called neutral interest rate, which is an estimate rather than a precise scientific calculation of the level of interest rates that neither suppresses nor stimulates the economy.

Some Federal Reserve officials and economists believe that in the post-COVID-19 economy, labor productivity has increased, so the neutral interest rate may be higher than before.

Considering the uncertainty, gradually proceeding with interest rate cuts is more attractive to the Federal Reserve.

Barkin said that if officials could somehow be certain about where the neutral interest rate is, they could move directly there and declare victory. But in reality, it's not that simple.

In a podcast episode recorded last week, he said, "You need to feel your way across the river... You will understand the situation based on whether inflation has stabilized or is accelerating, and whether the labor market is growing or shrinking. You will understand these situations along the way and adjust interest rates accordingly."

Others at the Federal Reserve, such as San Francisco Fed President Daly, believe that worrying about the neutral interest rate now is premature.

In a television interview, she said, "What really matters now is that even as we adjust policy rates to ensure they are correct, policy will still be in a restrictive area. We still have a long way to go." She said