Powell's "dovish" tone ignites market frenzy, some industry insiders remain cautious.

Federal Reserve Chairman Jerome Powell's speech at Jackson Hole sparked a rise in risk assets. However, some investors are cautious about Powell's dovish comments, as they are concerned about the possibility of stagflation in the future and worry that the market may be too optimistic. Powell gave his final speech as Federal Reserve Chairman at the Jackson Hole Economic Symposium on Friday. He hinted at a rate cut in September, but did not make a clear statement, seeking to strike a balance between the increasing risks in the job market and persistent inflation concerns. Powell's speech comes against the backdrop of ongoing pressure from the White House to ease monetary policy. The White House's actions have raised concerns in the market that political factors may lead the Federal Reserve to cut rates too aggressively in the future. Matthew Miskin, Co-Chief Investment Strategist at Manulife John Hancock Investments, said, "Powell did indeed lock in a rate cut in September, and this certainty is having a positive impact on global markets. This still leaves one question: what happens after September? I think this is where the market is overly optimistic." Before the Jackson Hole meeting, the poor performance of the US job report for July and the significant downward revision of previously released employment data led to expectations that the Federal Reserve will cut rates later this year from the current range of 4.25%-4.5%. However, these expectations have weakened in recent weeks as a surge in wholesale prices in July has raised concerns in the market that high inflation may limit the Federal Reserve's ability to save the market through significant rate cuts. Drew Matus, Chief Market Strategist at Metlife Investment Management, said, "People are increasingly worried that the US is heading towards stagflation." Stagflation refers to the situation where economic growth is slow while inflation remains high. Matus added that investors had originally expected inflation to "last for a while," but the real question is still how much the economy can grow. Matus said, "I think we will see some growth, but it doesn't feel like it will be good." Investors also noted that more inflation and labor market data will be released before the next Fed meeting, which could impact rate decisions and potentially hinder market gains. Tom Graff, Chief Investment Officer at Facet, said, "Looking ahead over the next few months, cutting rates alone won't be enough to support the continued strength of the stock market. If the economy really stalls and the labor market continues to deteriorate, this round of market gains will face risks." Market increases bets on rate cut in September Others in the market believe that optimism is reasonable. Paul Eitelman, Chief Investment Strategist for Global Investment at Russell Investments, said, "If the Fed decides to take action, gradually lower rates, and slightly loosen its grip on the economy, I think it is completely reasonable to see the market rebound." Before Powell's speech, rate futures traders estimated a 70% chance of a 25-basis-point rate cut in September. LSEG data later showed that this likelihood increased to 80% later on Friday. The yield on the 2-year US Treasury bond, sensitive to interest rates, fell by about 10 basis points to 3.69%. The benchmark 10-year US Treasury bond yield fell by almost 8 basis points to 4.26%. Bond yields move inversely with prices. On Friday, major US stock indexes surged. The Dow rose 1.89%, hitting a new high, the S&P 500 rose 1.52%, approaching its historical high, and the Nasdaq rose 1.88%. The small-cap Russell 2000 index rose 3.8%. Angelo Kourkafas, Senior Investment Strategist at Edward Jones, said Powell's comments were "good news for the market." He said, "We still expect further easing of policy, which at least provides some reassurance because it means that stock valuations and market expectations are somewhat justified." Concerns over Federal Reserve independence However, Powell's speech raised concerns in the market about an economic slowdown, leading to a sharp drop in the US dollar. Concerns about the independence of the Federal Reserve have intensified the selling of the US dollar. Lower interest rates may reduce the attractiveness of the US dollar to investors seeking higher returns, reducing demand for the dollar. The dollar index fell by 1%. Karl Schamotta, Chief Market Strategist at Corpay, said, "Interest rate differentials are having a negative impact on the dollar." He also added that traders are preparing for a "significant rally outside the US." Powell's term as Federal Reserve Chairman will end in May next year. US President Donald Trump has repeatedly pressured Powell to cut rates. Powell reiterated on Friday that Federal Reserve policy will strictly be data-driven and will not deviate from this principle. However, earlier this week, Trump urged Fed Governor Lael Brainard to resign, a move that could allow him to appoint more dovish members to the Federal Open Market Committee responsible for setting rates. Trump said on Friday that if Brainard does not resign over the mortgage scandal, he will fire her. Helen Given, Head of Trading at Monex USA, said, "Trump's comments about Brainard...have once again raised concerns about the independence of the Federal Reserve."