Powell's "farewell speech" implies a rate cut in September, with a focus on employment risks.

On Friday, US Federal Reserve Chairman Jerome Powell gave a speech at the annual economic symposium of the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming, once again becoming the focus of global financial markets. Powell's term as Federal Reserve Chairman will expire in May 2026, making this his final speech at the conference as chairman. At this gathering of central bank officials and economists from around the world, Powell sent the long-awaited signal to the markets that the Fed may cut interest rates in September. However, he also warned that the downside risks to the labor market are increasing, which is a key topic of discussion at this year's conference. Powell stated that the current Fed policy is still in a restrictive range, and that "changes in the balance of risks may require an adjustment in the policy stance." While this was not a promise to cut rates, it was enough for the markets to interpret it as a dovish signal. According to the CME FedWatch tool, traders are betting with about an 86% probability that the Fed will cut rates by 25 basis points in September. Boosted by this, the Dow Jones Industrial Average rose by 1.89%, hitting its first record high of the year, while US bond yields simultaneously declined. However, Powell remained cautious in his speech, emphasizing that "monetary policy has no preset path," and that the extent and pace of rate cuts will be discussed in the future. Powell specifically pointed out that the job market is experiencing a "strange balance," with both labor supply and demand weakening. Data shows that the three-month average of nonfarm payroll job additions in July was only 35,000, far below the level of 168,000 per month in 2024. Powell warned, "The downside risks to employment are rising, and if this trend continues, it may quickly manifest in the form of job layoffs." This makes future data crucial. First, the August nonfarm employment report, if weak, would provide stronger reasons for a rate cut in September and could potentially push the Fed into a more prolonged easing cycle; if job data is strong, it would give Powell the room for a more gradual approach. Powell also mentioned that the Fed's current interest rate level is "closer to the neutral rate by 100 basis points compared to a year ago," indicating that monetary policy restrictions have significantly eased, and that there is no need for aggressive easing in the short term. Furthermore, he mentioned that the theoretically neutral interest rate may be higher than in the 2010s, due to changes in productivity, population structure, and fiscal policy, among other reasons. In other words, even with two to three rate cuts in the future, policy rates may still remain in a restrictive range. Regarding inflation, Powell expressed concerns about the Trump administration's tariff policy, stating that this would further increase price pressures in the coming months, making the Fed's balancing act between its "dual mandate" more challenging. This indicates that if the market expects a quick return to a low interest rate era, they may be disappointed. Powell's implication is that even with a rate cut in September, it does not necessarily mean the beginning of a new era of easing. There is widespread attention on the economic forecast summary that the Fed will release at the September policy meeting, which may reveal the policymakers' overall expectations for rate cuts throughout the year.