Powell’s latest pivot won’t be De Investing.com’s last

Federal Reserve Chairman Jerome Powell’s speech at the Jackson Hole Economic Symposium on Friday marked a significant shift in the central bank’s stance on monetary policy.

Powell signaled that the Fed is now poised to cut interest rates, aligning with market expectations for a series of rate cuts. His remarks suggest that the Fed’s dual mandate of price stability and full employment is increasingly leaning toward supporting the labor market, even as inflation moves toward the Fed’s 2 percent target.

During the speech, Powell did not dismiss market expectations for multiple rate cuts.

“The time has come for politics to adapt. The direction of travel is clear, and the timing and pace of tariff cuts will depend on the data received, the evolution of the outlook and the balance of risks,” he said.

While not more accommodative than the market, Powell “did not express any adverse views to alter the market’s comfortable expectations for more rate cuts,” strategists at Yardeni Research said in a note.

The federal funds rate (FFR) futures market is currently pointing to a total of 100 basis points of cuts, bringing the rate down to 4.25% by the end of the year. Projections suggest that the FFR could fall further to 3.00% by the end of next year.

However, strategists at Yardeni believe Powell’s comments on Friday may have been “overblown” by the evidence and that his latest pivot “will not be his last.”

They note that while inflation has trended downward, it may not be wise to ease policy too quickly, especially as the labor market remains relatively strong.

Powell’s pointed out that “upside risks to inflation have receded” while “downside risks to employment have increased”. This reflects the Fed’s view that the labor market, which has cooled from its previously overheated state, is now a bigger concern than the possibility of re-accelerating inflation.

But if inflationary pressures resurface, it could leave the Fed vulnerable, according to Yardeni.

Strategists point out that just a month ago, Powell was stressing the need to maintain tight policy to keep demand in line with supply and manage inflationary pressures.

At the time, Powell repeatedly mentioned the Fed’s dual mandate of price stability and full employment, indicating a balanced approach. In contrast, in Jackson Hole, Powell mentioned the mandate only twice, putting more emphasis on the need to support the labor market.

However, that stance could require another pivot from Powell and the Fed if economic conditions change again, Yardeni strategists warned.

“In our view, Powell was overly accommodative on Friday, unnecessarily, as the labor market simply normalized after the effects of the pandemic rather than cooled in response to economic weakness,” they wrote.