The market celebrates the September interest rate cut as a "hidden crisis"; Powell's speech is not as dovish as it seems.

The market's dovish interpretation of Powell's speech may be excessive, as its core is the weighing of labor market and inflation risks. A rate cut may indicate that the economy is in trouble rather than merely a cooling of inflation. This article is based on a piece written by Li Xiaoyin, organized, translated, and written by Wall Street Journal. (Background: The Federal Reserve's mouthpiece: Don't fantasize about the Fed making significant rate cuts! Restrictive easing is the main theme of Powell) (Background Supplement: The Federal Reserve is beginning to worry about the U.S. real estate market: the market is clearly contracting, adding to recession concerns) American economist and Stanford University president Jonathan Levin believes that the market's dovish interpretation of Powell's speech may be somewhat excessive. Last Friday, Federal Reserve Chairman Powell's speech at the Jackson Hole Global Central Bank Conference was widely interpreted as a clear signal for a rate cut in September, igniting the market's enthusiasm and pushing U.S. stocks to new historical highs. However, American economist and Stanford University president Jonathan Levin wrote in a Bloomberg column on Saturday that a deeper interpretation of Powell's speech at Jackson Hole reveals that its core message is not unconditional easing, but rather a difficult balancing act between the sluggish labor market and soaring inflation in a foggy economic environment. Levin stated that the market's euphoric reaction on Friday largely overlooked the key subtleties in Powell's speech. He emphasized that if the Federal Reserve does cut rates, it may be because the economy is in trouble, and the central bank has to intervene, rather than due to cooling inflation. This deeply significant context was drowned out by the market's first reaction. The article emphasizes that Powell admitted in his speech that decision-makers are facing a tricky task of balancing the dual mission of promoting full employment and maintaining price stability. This policy dilemma suggests that the future path of rate cuts may be slower and more uncertain than the market expects. Difficult Choices Under Dual Goals The article points out that when inflation soared to 9.1% in 2022, the Federal Reserve's goals were very clear, and policy consensus was relatively easy to achieve. But now, the situation faced by policymakers is much more complex. Powell also emphasized in his speech: "When our goals are in such a state of tension, our framework requires us to balance both aspects of the dual mission." Levin explained that on one hand, although the unemployment rate is low, labor market data has begun to waver. On the other hand, the inflation rate remains slightly above the Federal Reserve's target of 2%. The article cites Powell's speech stating, "Our policy interest rate is now 100 basis points closer to neutral than it was a year ago," which allows the Federal Reserve to act "cautiously." However, he also warned, "Monetary policy is not set on a predetermined path." This policy divergence has already emerged within the Federal Reserve. The decision to maintain the interest rate at 4.25% to 4.5% in July faced opposition from two board members, marking the first occurrence since 1992, highlighting the significant divergence in interpreting current economic data. Downside Risks in the Labor Market The article emphasizes that behind the market's cheer for a rate cut, a key point that has been overlooked is that the main motivation for the Federal Reserve to cut rates may stem from concerns about economic deterioration. In Friday's speech, Powell specifically pointed out that the current labor market is in a "peculiar balance," where both labor supply and demand have significantly slowed, partly due to tightening immigration policies. Powell candidly stated, "This unusual situation indicates that the downside risks to employment are rising. If these risks materialize, they could quickly manifest in the form of sharp increases in layoffs and rising unemployment rates." In other words, a rate cut would be a defensive measure, not a triumphant declaration of a strong economy. The article points out that other data also supports this concern. Powell noted that the GDP growth rate in the U.S. in the first half of this year was only about half of that expected for 2024, partly due to a slowdown in consumer spending. This does not align with the foundation of a sustained bull run in the stock market. The Inflation Dilemma Remains Unresolved While worrying about the employment market, inflation risks still exist. The article states that many economists continue to worry that Trump's tariff policies will drive up commodity prices in the coming months and even quarters. Although the current impact seems moderate, industry insiders expect that when new cars for 2026 hit the market, the pressure for price increases will truly manifest. How to respond to the price shocks caused by tariffs is itself a heated debate topic. Doves believe policymakers should ignore this "one-time" price level change; while hawks worry that, against the backdrop of nearly five years of high inflation, this could exacerbate the loss of control over inflation expectations. Levin believes that Powell himself seems inclined to the camp that "ignores" the impact of tariffs, which may be one of the few dovish signals in his speech. However, he simultaneously warned, "We cannot take for granted that inflation expectations will remain stable," and acknowledged concerns in this regard. Market Reaction May Be Excessive The article concludes by emphasizing that the market's dovish interpretation of Powell's speech may be somewhat excessive, or because investors previously broadly expected his stance to be more hawkish, leading to position adjustments. The reality is much more subdued, but it is entirely appropriate for the current economic situation. Beyond the policy challenges, Powell's speech also cleverly avoided political pressure from Trump demanding significant rate cuts. From any angle, Powell's speech showed no signs of yielding to pressure. Levin stated that based on existing data, the Federal Reserve appears ready to cut rates as early as next month and then return to exploring appropriate interest rates that support sustainable growth and low inflation. However, the outlook remains highly uncertain, and the process of policy easing may be slower than the market expects. Related Reports The Federal Reserve's Powell goes dovish, "September rate cut probability surges," Bitcoin reacts by breaking through $117,000, and Ethereum rises close to historical highs. Why does a 16-year-old Bitcoin have a financial trajectory while the 112-year-old Federal Reserve does not? Market Observation: Trump's Strong Push for Cryptocurrency Federal Reserve Board Member, Is a September Rate Cut a Foregone Conclusion? "The market celebrates the September rate cut 'hidden crisis', Powell's speech is not as dovish as it seems" This article was first published in BlockTempo, the most influential blockchain news media.