Guotai Haitong: The Federal Reserve may start cutting interest rates in September, with up to two rate cuts expected by the end of the year.

Guotai Haitong released a research report stating that Powell's speech at the 2025 Jackson Hole Global Central Bank Annual Meeting has clear dovish signals. He believes that the risk of job decline is greater than the risk of inflation increase, providing forward guidance for a new round of preventive interest rate cuts. The revision of the US monetary policy framework also points towards a more adaptive and flexible monetary policy. The Fed may begin cutting rates in September, but with a preventive tone and inflation impact, the pace will not be too fast, with expectations of up to two rate cuts this year. On August 22, 2025, Powell delivered a speech at the annual Jackson Hole Global Central Bank Annual Meeting, providing short-term outlooks on the economic situation and monetary policy, releasing marginal information in three areas: First, a reassessment of the US labor market, believing that the balance achieved by the slowdown in supply and demand is unsustainable, with significant risks of rapid deterioration in future employment. Second, the ongoing impact of tariffs on inflation is likely to continue, but is unlikely to lead to a wage-inflation spiral or inflation expectations-real inflation spiral. The inflation impact of tariffs is "one-off" and not a major concern. Third, in the short term, the risk of job decline is greater than the risk of inflation increase, leading to a shift in monetary policy. Powell's first time expressing a dovish signal since 2025. Since 2025, Powell has been consistently hawkish or ambiguous, and this direct expression is undoubtedly a dovish signal, essentially providing forward guidance for a rate cut in September 2025. During this Jackson Hole meeting, Powell also announced the revised "Long-Term Goals and Monetary Policy Strategy Statement," which is a five-year review of the US monetary policy framework, with the last review in 2020. The prototype of the monetary policy framework was a consensus statement reached during Ben Bernanke's time in 2012, first revised in 2020, and is now undergoing a second revision. Compared to the 2020 version, there are four marginal changes in this revision: First, the statement that the effective lower bound (ELB) is an essential feature of the economy has been removed. While the economy is unlikely to reach the zero interest rate lower bound, there is still a small probability risk. Second, the compensation strategy of monetary policy has been removed, moving from a flexible average inflation target regime back to a flexible inflation targeting regime. Third, the consideration of "insufficient" employment used in 2020 has been replaced with "deviation from" full employment, giving more consideration to the impact of fluctuations in the labor market on inflation. Fourth, the Fed has provided a balance method when employment and inflation targets are not complementary, focusing on the main contradictions. Overall, the changes in the Fed's monetary policy framework this time are not significant. The core changes are in response to the current changes in the employment and inflation environment, providing more flexible space for future monetary policy adjustments. Powell's speech at the Jackson Hole annual meeting laid the foundation for a dovish turn, with expectations of a new round of preventive rate cuts to come, but constrained by inflation, there may be two rate cuts this year. Similar to 2024, when Powell stated, "Now is the time to adjust policy" and began cutting rates consecutively from September, cutting by a total of 100 basis points for the year. This time, Powell stated, "The shift in baseline outlook and risk balance may require adjustments to our policy stance," marking a significant reversal from the previously hawkish stance, providing forward guidance for a rate cut at the September meeting. However, Guotai Haitong believes that this round of rate cuts is still preventive, with the rate cut likely not being too fast, expecting a 25-basis-point cut in September, with up to two rate cuts this year and a total reduction of around 50 basis points. The likelihood of consecutive large rate cuts is not high.