The Market Anticipates, the Fed is Cautious: Towards "Rate Cuts" Despite Persistent Inflation — Powell Indicates a Shift in Focus and Market Enthusiasm

"Why signal a rate cut when inflation is still high?" A remark by Jerome Powell, Chairman of the Federal Reserve Board (FRB), at Jackson Hole triggered simultaneous stock rises, dollar depreciation, and interest rate declines. The key is the FRB's shift in focus from "prices" to "employment" risks. The Chairman stated, "Policy is already restrictive, and a change in risk balance could justify an adjustment," making a small rate cut at the September meeting suddenly seem more realistic. Federal Reserve System

What Happened

Chairman Powell acknowledged the inflationary impact of tariffs (the so-called "tariff shock") but cautiously noted that it does not necessarily lead to a sustained wage-price spiral. Meanwhile, signs of a slowdown in the labor market have become clear, and the risk of rising unemployment is being weighed more heavily. This represents a rebalancing of the FRB's dual mandate of price stability and maximum employment. InfoMoneyFederal Reserve System

Market Reaction

Immediately after the speech, the Dow hit a new year-to-date closing high, with the S&P 500 and Nasdaq rising by 1-2%. The dollar softened against major currencies, and U.S. interest rates moved lower. In Brazil, the Bovespa index surged by +2.5%, with expectations of a U.S. rate cut providing a tailwind for emerging market risk assets. InvestopediaYahoo FinanceReutersInfoMoney

How Strong is the "September Rate Cut" Consensus?

The probability calculated from CME FedWatch futures surged to 80-90% before and after the speech. The market places a 0.25% "preventive" rate cut as the main scenario. However, the FRB repeatedly emphasizes "data dependency" and highlights uncertainties such as PPI overshoot and secondary effects of tariffs. The usual "two-tiered" approach to curb excessive easing expectations is in place. InvestopediaReuters

Background: The "Twist" Between Inflation and Employment

Current U.S. inflation is slightly above the 2% target. Despite this, the hint of a rate cut is due to the nature of employment deceleration, which can "manifest quickly and suddenly." The Chairman mentioned the side effects of monetary policy with "lags," showing a stance of prioritizing the risk of a sharp rise in unemployment. As a result, the FRB is rebalancing in a "twist" situation where inflation is slightly high, and employment is fragile, shifting the weight to the employment side. InfoMoney

Social Media Sentiment: Bullishness Prevails, but Caution Against "Overreach"

On X (formerly Twitter), prominent journalists and analysts widely viewed a 25bp rate cut in September as almost certain, signaling a broad "risk-on" sentiment for U.S. stocks and cryptocurrencies. However, there were also brakes on excessive expectations, noting that "the tone is dovish, but it does not promise unlimited easing."

• "The possibility of a 25bp rate cut in September is extremely high" — U.S. economic journalist Heather Long.X (formerly Twitter)X (formerly Twitter)

• "The remarks are dovish, and the market is going risk-on all at once" — Market commentary post.X (formerly Twitter)

• "The FRB has opened the door but maintains a data-dependent stance" — WSJ reporter's thread.X (formerly Twitter)

• Financial media and cryptocurrency accounts also quickly reported the "September rate cut hint."X (formerly Twitter)

Overall, the "welcoming mood > cautious view" prevails, but the "conditional dovishness" shared widely implies that a single CPI or employment report could change the sentiment.

Counterpoints: Is There Really Room for a Rate Cut?

Some FOMC participants still worry about inflation's stickiness and caution that a premature rate cut could boomerang into "re-tightening." While the market strongly anticipates a September rate cut, it is not assumed to be the start of consecutive cuts. The Chairman's remarks also suggest "flexible and incremental" adjustments, akin to "insurance." The Wall Street Journal

Sector Implications (Investor Notes)

• Stocks: Positive for interest-sensitive sectors (growth, housing, durable goods). However, if "rate cut = economic concern" strengthens, a defensive shift may occur. Investopedia

• Bonds: Yields decline, led by the front end like 2-year and 5-year bonds. Volatility may increase depending on the dot plot and next month's employment/inflation data. Reuters

• Forex: The dollar softens on lower interest rate expectations, providing support for gold and commodities. ReutersYahoo Finance

• Cryptocurrencies: Liquidity expectations make "beta" more likely, but quick reversals are possible depending on financial conditions. Excessive leverage is inadvisable. X (formerly Twitter)

Impact on Brazil and Emerging Markets

Expectations of lower U.S. short-term interest rates provide a tailwind for emerging market currencies and stocks from the perspective of interest rate differentials and capital flows. In fact, the Bovespa rose by +2.5%, and the real remained strong. As long as the starting point for U.S. rate cuts is "risk balance adjustment" rather than "economic deterioration," it works relatively positively for EMs. InfoMoney

Conclusion: The FRB's "Ambidextrous" Steering

This message is not a "victory declaration for inflation control" but a preparation for "employment downside risk exceeding the threshold." By taking a 25bp "insurance step" in September and making fine adjustments at each data turning point thereafter, the FRB is subtly but surely leaning towards a dovish stance. Neither excessive optimism nor excessive pessimism is needed. What is required is the market's "endurance" to carefully build up each piece of next month's employment, CPI, and PPI data. Federal Reserve System

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