Powell's "dovish" remarks ignite market frenzy, some industry insiders remain cautiously observant

According to the Zhitong Finance APP, Federal Reserve Chairman Jerome Powell's speech at Jackson Hole triggered a rise in risk assets. However, some investors are cautious about Powell's dovish remarks, as they worry about the potential for stagflation in the future and are concerned that the market is overly optimistic.

Powell delivered his final speech as Federal Reserve Chairman at the Jackson Hole Economic Symposium on Friday. He hinted at a possible rate cut in September but did not make a definitive statement, seeking an appropriate balance between the increasingly severe risks in the labor market and persistent inflation concerns.

Powell's remarks came amid ongoing pressure from the White House to ease monetary policy. The White House's actions have raised market concerns 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, stated, "Powell has indeed locked in a rate cut for September, and this certainty is having a positive impact on global markets. The question remains: what will happen after September? I think this is where the market is overly optimistic."

Before the Jackson Hole meeting, the U.S. employment report for July was disappointing, and previously released employment data was significantly revised downward, raising expectations that the Federal Reserve would lower rates from the current range of 4.25%-4.5% later this year.

However, in recent weeks, these expectations have gradually weakened as a surge in wholesale prices in July raised concerns that high inflation would limit the Federal Reserve's ability to rescue the economy through significant rate cuts.

Drew Matus, chief market strategist at Metlife Investment Management, stated, "People are increasingly worried that the U.S. is heading toward stagflation." Stagflation refers to a situation where slow economic growth and high inflation coexist.

Matus added that investors initially expected inflation to "last for a while," but the real question remains how much the economy can grow.

Matus stated, "I think we will achieve some growth, but it won't feel good."

Investors also pointed out that more inflation and labor market data will be released before the Federal Reserve's next meeting, which could influence rate decisions and potentially hinder market gains.

Tom Graff, chief investment officer at Facet, stated, "Looking ahead to the next few months, simply cutting rates will not be enough to support a sustained rally in the stock market. If the economy does stagnate and the labor market continues to deteriorate, then this round of stock market gains will be at risk."

Market Increases Bets on September Rate Cut

Others in the market, however, argue that optimism is warranted.

Paul Eitelman, global chief investment strategist at Russell Investments, stated, "If the Federal Reserve decides to take action, gradually lowering rates and slightly easing its control over the economy, I think it is entirely reasonable for us to see a market rebound."

Before Powell's speech, futures traders were pricing in a 70% chance of a 25 basis point rate cut in September. According to LSEG data, this probability rose to 80% later on Friday The yield on the 2-year U.S. Treasury bond, which is sensitive to interest rates, fell by about 10 basis points to 3.69%. The benchmark 10-year U.S. Treasury yield dropped nearly 8 basis points to 4.26%. Bond yields move inversely to prices.

On Friday, major U.S. stock indices surged. The Dow Jones Industrial Average rose 1.89%, reaching a record high, the S&P 500 index increased by 1.52%, nearing its historical peak, and the Nasdaq rose 1.88%. The small-cap Russell 2000 index climbed 3.8%.

Edward Jones senior investment strategist Angelo Kourkafas stated that Powell's remarks are "good news for the market." He noted, "We still expect further policy easing, and this fact at least provides some reassurance, as it means that (stock) valuations and market expectations are based on some rationale."

Concerns Over Federal Reserve Independence

However, Powell's speech raised concerns about an economic slowdown, leading to a significant drop in the dollar. Worries about the independence of the Federal Reserve exacerbated the dollar sell-off.

Lower interest rates may reduce the dollar's appeal to investors seeking high yields, thereby decreasing demand for the dollar. The dollar index fell by 1%.

Corpay chief market strategist Karl Schamotta stated, "The interest rate differential is negatively impacting the dollar." He also added that traders are preparing for "a significant rally outside the U.S."

Powell's term as Federal Reserve Chairman will end in May next year. U.S. President Donald Trump has previously pressured Powell to cut interest rates. Powell reiterated on Friday that Federal Reserve policy will be strictly data-driven and will not deviate from this principle.

However, earlier this week, Trump urged Federal Reserve Governor Lisa Cook to resign, a move that could allow him to appoint more dovish members to the Federal Open Market Committee responsible for setting interest rates. Trump stated on Friday that he would fire Cook if she did not resign due to the mortgage scandal.

Monex USA trading director Helen Given remarked, "Trump's comments about Cook... have once again raised concerns about the independence of the Federal Reserve."