Powell Hints At More Rate Cuts, Says "Economy In Favorable Place" But Warns Of "Significant Risks"

The much anticipated Jerome Powell Jackson Hole speech on "Challenges for Monetary Policy" is finally out, and the first thing that stands out is Powell's assurance that the economy is in a "favorable place," but immediately refers to “significant risks” in the very first paragraph of a text that, according to Bloomberg "ultimately appears to signal a rate cut at the FOMC’s September meeting."

In what appears to be a last minute rewrite of his speech following today's Chinese retaliation, Powell calls attention to an “eventful” three weeks since the July FOMC meeting, highlighting negative developments, including:

  1. The announcement of new tariffs on imports from China.
  2. Further evidence of a global slowdown, notably in Germany and China. Geopolitical events have been much in the news, including the growing possibility of a hard Brexit, rising tensions in Hong Kong, and the dissolution of the Italian government. Financial markets have reacted strongly to this complex, turbulent picture. Equity markets have been volatile.
  3. Long-term bond rates around the world have moved down sharply to near post-crisis lows.

This, to Bloomberg economist was "the key part of the speech" noting that "as Keynes famously said, "When the facts change, I change my mind." This is an indication that the Fed is tilting toward a more aggressive policy response, largely as a result of intensifying frictions on the trade front."

And yet, despite the global slowdown, "the U.S. economy has continued to perform well overall, driven by consumer spending. Job creation has slowed from last year’s pace but is still above overall labor force growth. Inflation seems to be moving up closer to 2 percent."

Countering this clear stability in the US, and in an attempt to appease Trump, Powell says that “based on our assessment of the implications of these developments, we will act as appropriate to sustain the expansion, with a strong labor market and inflation near its symmetric 2 percent objective."

Of note, there is no explicit reference to a "mid-cycle adjustment", which was seen by many as the biggest hawkish signal. As Bloomberg's Steve Matthews notes, "by dropping that language, Powell puts emphasis on the “act as appropriate” language. That says, in essence, as Mario Draghi put it once, the Fed will do “whatever it takes” to keep the expansion going." The result is that, according to algos at least, the speech will be perceived as borderline dovish; the question, however, is whether it will be seen as dovish enough?

One answer why this may be no is the following language, which suggests that Powell may wait to see the effects of the July rate cut:

"Along with July’s rate cut, the shifts in the anticipated path of policy have eased financial conditions and help explain why the outlook for inflation and employment remains largely favorable."

Additionally, as Renaissance Macro's Neil Dutta notes, “we see significant risks, including a prolonged shortfall below 2 percent on our inflation objective, so let’s go small. Is that the takeaway here? Because that would not be pleasant. This feels like Powell moving away from the risk-management approach he purports to be guiding his decisions.”

Moving on, and perhaps shifting back to a more dovish take, Powell devoted an entire section of his speech to trade uncertainties as a new challenge for monetary policy, which confirms that the more trade war escalates, the greater the Fed response, giving Trump a green light to escalate further.

A notable comment is that according to Powell, there are "no recent precedents to guide any policy response to the current situation."

This perhaps explains the curious pivot in the speech which indicates that the Fed will no longer be backward looking, i.e. data dependent, but rather will be more focused on the outlook when framing the Fed's risk-management approach:

“Because the most important effects of monetary policy are felt with uncertain lags of a year or more, the Committee must attempt to look through what may be passing developments and focus on things that seem likely to affect the outlook over time or that pose a material risk of doing so. Risk management enters our decision making because of both the uncertainty about the effects of recent developments and the uncertainty we face regarding structural aspects of the economy, including the natural rate of unemployment and the neutral rate of interest. It will at times be appropriate for us to tilt policy one way or the other because of prominent risks.”

In his speech, the Fed chair also provides a historical tour of three different post-World-War-Two policy eras and their lessons for the Fed: the Great Inflation, the Great Moderation and the Great Recession, and adds that the Fed has learned how to tame inflation and has substantially improved the safety of the financial system, but is still unsure how to deal with the current era of super-low interest rates.

And in an interesting tangent pointed out by Bloomberg's Steve Matthews, much of  Powell’s speech is an academic review of monetary policy over recent decades and not aimed at the current outlook. What makes it notable is that today Powell "gave a shout-out today to Paul Volcker for ending rampant inflation and too-high inflation expectations with very high interest rates in the early 1980s."

According to Matthews, "there is a message here to the hawks on the committee. While Powell might disagree with them right now on the need for lower rates -- which he seems to favor -- he is not going to backslide to an era of unanchored inflation expectations. That’s obviously not much of a risk anytime soon, though most of the Fed officials grew up in the 1970s and 1980s and are still very alert to the risk."

In short: just as he was uber hawkish a year ago and since flipped dovish, should the data require it, Powell has no problem reverting back to a hawk on a moment's notice.

Here are the key highlights:


Some more highlights:

  • *Fed's Powell: Fed Will Act as Appropriate to Sustain the Expansion
  • *Powell: Three Weeks Since Last FOMC Meeting Have Been 'Eventful'
  • *Powell: Fitting Trade Policy Into Risk-Management Framework Is a New Challenge
  • *Powell: Fed Faces Heightened Risk of Difficult-to-Escape Periods of Near-Zero Rates
  • *Powell: U.S. Economy Has Continued to Perform Well Overall
  • *Powell: Monetary Policy Cannot Provide Settled Rulebook for Trade
  • *Powell Sees Financial Stability Risks as Moderate, but Will Remain Vigilant
  • *Powell Sees Financial Stability Risks as Moderate, but Will Remain Vigilant
  • *Powell: Monetary Policy Cannot Provide Settled Rulebook for Trade
  • *Powell: Can Try to Look Through Passing Events, Focus on How Trade Affects Outlook

As expected, Powell also addressed the Fed's ongoing policy review saying that "to address this new normal, we are conducting a public review of our monetary policy strategy, tools, and communications—the first of its kind for the Federal Reserve. We are evaluating the pros and cons of strategies that aim to reverse past misses of our inflation objective. We are examining the monetary policy tools we have used both in calm times and in crisis, and we are asking whether we should expand our toolkit. In addition, we are looking at how we might improve the communication of our policy framework

His full speech below (pdf link):