Powell’s Latest Pivot Won’t Be His Last

Federal Reserve Chair Jerome Powell’s address at the Jackson Hole Economic Symposium on Friday indicated a notable shift toward a more accommodating stance in the central bank’s monetary policy.

Powell expressed that the Federal Reserve is now ready to consider lowering interest rates, aligning with prevalent market predictions of a series of cuts. His comments imply that the Fed’s dual focus on price stability and maximum employment is increasingly directed towards bolstering the labor market, despite inflation moving closer to the Fed’s 2% target.

Throughout his speech, Powell refrained from challenging market expectations regarding multiple rate reductions. He stated, “The time has come for policy to adjust. 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.”

While he did not present a more dovish perspective than what was anticipated, analysts noted that Powell “didn’t express any hawkish sentiments that would disrupt the market’s expectations for several rate cuts.”

Currently, futures for the federal funds rate indicate a total reduction of 100 basis points, potentially lowering the rate to 4.25% by the end of the year. Further projections suggest it could decline to 3.00% by the end of the next year.

However, some analysts argue that Powell’s comments were excessively dovish and suggest that this shift may not be his last. They caution that while inflation is decreasing, hastily loosening policy might be inadvisable, especially with a relatively strong labor market.

Powell noted that “upside risks to inflation have diminished,” while “downside risks to employment have increased.” This reflects the Fed’s growing concern about the labor market, which has cooled from previous highs but is viewed as a more pressing issue than the chance of inflation rising again.

If inflationary pressures return, the Fed might find itself in a precarious position, according to analysts. They pointed out that just a month prior, Powell highlighted the necessity of maintaining a restrictive policy to align demand with supply and manage inflation.

During that earlier address, Powell frequently referred to the Fed’s dual mandate, suggesting a balanced approach. In contrast, his recent remarks featured this mandate only twice, placing more emphasis on the importance of supporting the labor market.

Analysts expressed concern that if economic conditions shift once more, another pivot from Powell and the Fed may be required. They stated, “In our opinion, Powell was too dovish on Friday, as the labor market has merely normalized from pandemic effects rather than weakened due to economic downturns.”