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In his speech, Powell noted the U.S. economy’s resilience despite challenges from President Donald Trump’s tariffs and immigration policies. Inflation remains above the Fed’s 2% target (PCE index at 2.6% in June 2025), driven partly by tariff-related price increases, while the labor market shows signs of weakening, with July’s job growth at 73,000, well below expectations, and downward revisions of 258,000 jobs for May and June.

Monetary Policy Outlook: Powell signaled openness to interest rate cuts at the September 16-17, 2025, FOMC meeting, admitting that monetary policy is in restrictive territory, and the baseline outlook and the shifting balance of risks may warrant adjusting the policy stance. However, he avoided committing to a specific timeline or size of cuts, citing mixed signals from rising inflation and a cooling job market.

The CME FedWatch tool showed a 74% probability of a September rate cut, down from near certainty earlier in August, reflecting uncertainty about the size and timing.

Powell also spoke about Fed’s revised “Statement on Longer-Run Goals and Monetary Policy Strategy”, emphasizing adjustments to address evolving economic conditions, such as demographic shifts and productivity changes affecting labor markets.

Political Pressures: While Powell did not directly address political pressures, the speech occurred amid President Trump’s criticisms of the Fed’s independence, including calls for Fed Governor Lisa Cook’s resignation and Powell’s own potential replacement, as his term ends in May 2026.

How experts read Powell lips

Market experts, participants, and media provided varied interpretations of Powell’s speech, reflecting its cautious tone and the complex economic environment:

Analysts at Barclays and BNP Paribas revised their forecasts to predict a September rate cut, interpreting Powell’s remarks as dovish, though he avoided endorsing large cuts (e.g., 50 basis points) sought by some Republicans.

Experts highlighted Powell’s acknowledgment of a “challenging dichotomy” between tariff-driven inflation and a weakening labor market. Deutsche Bank analysts noted that a hawkish stance could unsettle markets, particularly for rate-sensitive sectors like homebuilders and small caps. Conversely, a dovish tilt was seen as supportive of equities.

Media outlets, including The Guardian and Reuters, emphasized the political backdrop, with Trump’s attacks on Fed independence overshadowing the speech. Trump’s comment, “He should have cut them a year ago. He’s too late,” underscored tensions, with some analysts concerned about the Fed’s autonomy.

Overall, experts and media saw Powell’s speech as a balancing act, addressing economic challenges while navigating political pressures and maintaining Fed credibility. The lack of a clear commitment to rate cuts left room for interpretation, with some viewing it as pragmatic and others as overly cautious.

Global Perspective

The presence of other central bankers, such as ECB President Christine Lagarde and Bank of England Governor Andrew Bailey, at the symposium, highlighted global monetary policy coordination challenges. Media noted the symposium’s focus on labor market transitions and data quality issues, with declining survey participation affecting economic projections.

Market Reaction

Financial markets responded positively to Powell’s dovish tilt, interpreting his openness to rate cuts as supportive of growth.

The S&P 500 rose approximately 1.5–1.6%, the Nasdaq Composite climbed nearly 2%, and the Dow Jones Industrial Average surged 1.9–2%, reaching a record intraday high. The rally reflected relief at the prospect of looser monetary policy, particularly for growth-oriented and rate-sensitive stocks.

U.S. Treasury yields fell, with the two-year Treasury yield dropping nearly 10 basis points to 3.69% and the 10-year yield declining 6 basis points to 4.27%. The yield curve steepened, with the spread between 5- and 30-year rates hitting a cycle high, reflecting mixed expectations for inflation and growth.

The U.S. dollar weakened against a basket of currencies, including the euro and yen, with the Bloomberg Dollar Spot Index falling about 0.4%. This reflected expectations of lower rates reducing the dollar’s appeal.

Options pricing indicated an expected S&P 500 move of about 0.8% in either direction, nearly twice the average daily move over the past month, underscoring the speech’s anticipated impact.

The market’s upbeat response contrasted with pre-speech jitters, as Wall Street had been on edge, with the S&P 500 declining for five consecutive days prior to August 22 due to uncertainty over Powell’s stance and disappointing retail earnings.

Conclusion

Powell’s Jackson Hole speech last week, signaled a potential shift toward rate cuts in September, driven by labor market concerns, but stopped short of a firm commitment due to persistent inflation risks from tariffs. Market experts and media viewed the speech as cautiously dovish, navigating a complex economic and political landscape. Markets reacted positively, with equities rallying, bond yields falling, and the dollar weakening, reflecting optimism about potential monetary easing. However, the lack of definitive guidance and ongoing political pressures left some uncertainty, with analysts bracing for volatility depending on future economic data and Fed actions.

I however do not see a significant impact of the US market reaction on the Indian markets in the near term. Any enthusiastic response to the elevated rate cut hopes might be met with some aggressive selling.

Back home, the Reserve Bank of India (RBI) has recently released a discussion paper listing proposals to suitably refine the extant monetary policy framework, to address emerging economic challenges, such as supply shocks, global uncertainties, and climate-related risks. More on this in my next post.

Wish the readers A Happy Ganesh Utsav. May the Lord of Intellect and Conscience, remove all our obstacles created by our greed, ignorance, ego, intolerance, lust, material attachment, etc., and bless us with wisdom, contentment and peace.