Federal Reserve Chairman Jerome Powell delivered an important call to action on infrastructure in his Jackson Hole Economic Symposium speech. He called out a worrisome bifurcation in the labor market and struck a generally positive note on future monetary policy. In his prepared remarks, Powell focused on how the labor supply has cratered. At the same time, he added that this decline has been quickly blunted to counteract dips in demand.
Powell’s dour assessment of the current economic landscape did not bode well for employment. He stated that the jobs market had worsened, raising alarms about potential risks to employment that he categorized as being tilted to the downside. This scary outlook matches what we’ve seen in recent payroll reports, which have all flashed red with a deep plunge in jobs being created. The three-month moving average of job growth is at its lowest point during the pandemic. This scary trend is an early warning of very difficult times ahead for the labor market.
Along with employment issues, Powell signaled that inflation risks have moved to the upside. As for tariffs, Zandi said the base case assumes that the inflationary impacts of tariffs will be transitory. He made it clear that the long-term inflationary pressures are continuing to be a key worry. The July Producer Price Index (PPI) figures were recently released, and they showed escalating producer costs. This emerging trend led many to worry about imminent upward pressures on consumer inflation.
These hawkish comments from Powell were impactful enough to move the markets’ expectations on where interest rates would be headed. Following his comments, futures markets assigned around a 90% probability of a rate reduction at next month’s Federal Open Market Committee (FOMC) meeting. Such a cut would be a significant move in the direction of monetary policy to offset the economic weakening from this major expected cut. According to market analysts there’ll be a cumulative 55 basis points of cuts by year-end. This may be indicative of a rising consensus among investors that some more accommodative monetary policy is needed.
In fact, the market wasted no time in interpreting Powell’s comments. Consequently, the U.S. dollar crashed across the board against all currencies. Powell’s dovish sentiment ignited a firestorm of new expectations for additional rate cuts. As a result, a cut in September is all but certain. Most observers are already forecasting a December cut as policymakers continue to show an acute sensitivity to bubbling economic dangers.
Powell is set to give a keynote address later in the day. We expect him to provide the clearest window yet into today’s new economic dynamics and how the Federal Reserve intends to adjust its gameplan accordingly, strategically. The implications of his speech extend beyond the immediate market reactions. They underscore the challenges facing the central bank as it navigates a complex economic landscape marked by rising inflation and weakening labor market conditions.