After Powell spoke, the market celebrated! The Federal Reserve's interest rate cut in September is "a done deal," and then what?

Powell's speech at Jackson Hole gave the market a "shot in the arm," but it also planted new uncertainties.

Federal Reserve Chairman Powell's speech at the Jackson Hole Global Central Bank Annual Meeting was widely interpreted by the market as a clear signal for a rate cut in September. However, behind this dovish shift lies an increasing divergence within the Federal Reserve. For investors, a rate cut may be just around the corner, but the subsequent path of easing is far from smooth, and the uncertainty of policy prospects is becoming a new focus.

In last night's speech, Powell explicitly pointed out that "the balance of risks seems to be shifting" and emphasized that "downside risks to the labor market are increasing." He stated that since policy is already in a restrictive range, these factors "may require us to adjust our policy stance." This statement is widely seen as his strongest groundwork for initiating a rate cut.

The financial markets reacted enthusiastically. U.S. stocks surged, with the Dow Jones reaching a historic high, while U.S. Treasury yields fell sharply, with the 2-year yield dropping by 7.44 basis points.

Wall Street strategists quickly adjusted their expectations, believing that a rate cut in September is almost "a done deal." Deutsche Bank's Chief U.S. Economist Matthew Luzzetti stated that this is "a fairly strong signal" from Powell leaning towards a 25 basis point rate cut in September.

However, the market's optimistic sentiment did not completely mask the contradictions within the decision-making body. Powell's speech was far from an unconditional commitment; he also warned of the persistent inflation risks posed by tariffs. More importantly, the divisions within the Federal Reserve mean that even if a rate cut occurs in September, it could be a one-time compromise, and everything beyond that remains uncertain.

Wall Street's Dovish Interpretation: A Policy "Turning Point"

After Powell's speech, Wall Street almost immediately characterized it as a dovish turn. Many analysts believe this not only confirms the intention to cut rates in the short term but also marks a shift in the Federal Reserve's policy focus.

UBS macro sales department's Simon Penn believes that Powell's speech represents "a turning point" in policy bias, providing a framework and rationale for the shift in policy stance through a series of logical observations.

TradeStation Global Market Strategy Director David Russell's view is more direct; he stated that Powell "just overturned the mission," shifting the policy focus from price stability to full employment by emphasizing the weakness in the labor market.

This view has gained widespread acceptance. Charles Schwab Senior Investment Strategist Kevin Gordon stated that this speech "helps to confirm the rate cut in September, although it has not yet been officially confirmed, it does not necessarily mark the beginning of a comprehensive rate-cutting cycle."

Deutsche Bank's Matthew Luzzetti also pointed out that Powell's wording was more dovish than expected, especially as he did not attach upcoming data as a condition for the rate cut, sending a strong signal

What Happens After a Rate Cut? Serious Divisions Within the Federal Reserve

Although the market has a strong consensus on the expectation of a rate cut in September, there is far from a consensus within the Federal Reserve about what will happen afterward. According to Bloomberg, decision-makers are clearly divided into three major camps, which makes any sustained path of rate cuts face resistance.

The first camp is the "doves," who hope for multiple rate cuts. This camp includes Federal Reserve governors Waller and Bowman, who opposed the July meeting and are concerned about signs of weakness in the labor market.

The second camp is the staunch "hawks," who are skeptical or even opposed to rate cuts. Cleveland Fed President Beth Hammack stated last Thursday that she would not support a rate cut if the meeting were held that week, as inflation remains a threat. Kansas City Fed President Jeffrey Schmid took a harder stance, even suggesting that future rate hikes cannot be ruled out.

The third camp is the "centrists," who tend to adopt a more cautious "act once, then observe" strategy. Atlanta Fed President Raphael Bostic has previously expressed this viewpoint. Stephen Stanley, Chief U.S. Economist at Santander US Capital Markets LLC, inferred that the message from the September meeting is likely: “One rate cut, then we’ll see.”

Uncertain Path: "One-and-Done" Remains a Possible Option

Powell is walking a delicate tightrope. On one hand, he acknowledges that "the downside risks to employment are increasing," while on the other hand, he warns that tariffs could "trigger more persistent inflation dynamics." This balancing act of dual risks reflects the challenges he faces in bridging internal divisions.

This internal tension makes the future policy path extremely difficult to predict. Deutsche Bank's Luzzetti also acknowledged in another report that, considering the differing views within the committee, the simplest path may be a "gradual rate cut path," with subsequent actions becoming more data-dependent.

Therefore, investors should not underestimate the possibility of "one-and-done." Joe Brusuelas, Chief Economist at RSM US LLP, wrote in a report to clients that if hiring activity moderately rebounds while inflation continues to rise, it would point to a "one-and-done scenario."

Is the Future Data-Dependent?

Powell's remarks successfully shifted the market narrative from "Will there be a rate cut in September?" to "How many rate cuts will there be after September?"

As Dan Carter, Portfolio Manager at Fortis Investment Advisors, reminded, “The market will like this change in tone. But I think we need to be careful not to go too far. There is a lot of data between now and the next FOMC meeting.”

This means that the employment reports and inflation data in the coming weeks will become crucial. These data will serve as key bargaining chips in the internal game among the doves, hawks, and centrists within the Federal Reserve For the market, Powell's speech may have cleared the way for a rate cut in September, but the real suspense—"what's next?"—has just begun. Federal Reserve officials will release new economic forecasts at the next meeting, and their outlook on the future path of interest rates will be more important than the single rate cut decision itself