Powell’s Jackson Hole Speech Sets Low Bar for Significant Cuts to Ensure a Soft Landing

Federal Reserve Chair Jerome Powell delivered a dovish address at the Jackson Hole Symposium on Friday, indicating that the central bank may be prepared to implement a more significant rate cut to facilitate a soft landing for the economy.

“The time has come for policy to adjust,” Powell stated, committing to take “every measure possible to maintain labor market strength while the Fed continues to tackle inflation towards its 2% target.”

Powell’s focus on sustaining labor market strength implies that the Federal Reserve is open to considering a 50 basis points cut if upcoming data supports such a move to address deteriorating risks in employment, according to a note from Evercore ISI.

Although Powell did not specify whether the Fed would opt for a 25 basis points or a 50 basis points cut, he remarked, “the direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”

By signaling potential for larger cuts, the Fed is essentially providing “macro-insurance,” which appears to be indirectly supportive of market conditions, Evercore ISI noted.

Powell indicated that inflation and labor market indicators reveal an evolving scenario, with upward risks to inflation diminishing while downward risks to employment are increasing, thereby supporting the argument for rate cuts from the current range of 5.25% to 5.5%.

Although traders largely expect a 25 basis points cut in September, the likelihood of a larger 50 basis points reduction rose to 36% from 28% the day before.

Powell’s comments reinforced the dovish expectations reflected in the market rate curve, which influences borrowing costs across various durations. This should help “mitigate concerns” about the Fed delaying rate cuts or lagging behind economic needs.

These remarks come as the market anticipates significant economic data next week, including the PCE price index for July, scheduled for release on Friday.