New Federal Reserve News Agency: Powell signals cautious rate cuts, don't expect rapid declines in interest rates

The door to interest rate cuts by the Federal Reserve is slowly opening, but the road ahead is not smooth.

Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole meeting has completely ignited expectations for a rate cut in September. However, Powell is cautiously paving the way for a rate cut, signaling that this is more of a prudent strategic adjustment rather than the beginning of a comprehensive easing.

On August 23, renowned financial journalist Nick Timiraos, known as the "New Federal Reserve Correspondent," analyzed that Powell's move seems aimed at building consensus among his divided colleagues. He also conveyed a subtle yet clear message to the market: do not expect a "downhill sprint" of aggressive rate cuts.

Powell's cautious attitude stems from the complex situation facing the U.S. economy. He is trying to walk a tightrope between an increasingly fragile labor market and persistent inflationary pressures, indicating that the future policy path will be fraught with challenges.

On one hand, he described the state of the labor market as "peculiar," where the seemingly stable unemployment rate masks a potential weakness in the simultaneous decline of labor supply and demand. On the other hand, price increases driven by tariffs are gradually being transmitted into the economy, pushing the inflation rate towards 3%, deviating from the Federal Reserve's long-term target of 2%.

This stance means that, unlike the cumulative rate cuts of one percentage point from September to December last year, future easing policies will be more restrained.

The "Peculiar" Labor Market

The core reason Powell provided for the rate cut is his concern about the labor market outlook. He pointed out that the appearance of the labor market is deceptive, as the seemingly stable unemployment rate hides a "peculiar balance" of slowing labor participation and job demand.

He warned that an excessive focus on supply-side constraints, such as tightening immigration policies, might overlook signals of weakening demand, leading to a rapid deterioration of the employment market.

In Powell's view, a cooling labor market can serve as an effective mechanism to prevent one-time increases in goods costs due to tariffs from evolving into a vicious cycle of rising wages and prices.

According to Nick Timiraos, Powell's logic actually adopts the rate cut argument previously put forward by Federal Reserve Governor Christopher Waller, who advocated for a rate cut last month due to concerns about a weak labor market. Powell's move may be aimed at garnering support from skeptical colleagues to establish a broader policy consensus.

Internal Disagreements and Inflation Concerns

Despite Powell's efforts to build consensus, his inclination towards rate cuts still faces significant resistance within the Federal Reserve. Some officials believe that the reasons for a rate cut are insufficient due to high inflation, and that the risks to the labor market emphasized by Powell are exaggerated.

Cleveland Fed President Beth Hammack stated in an interview that price pressures "are rising and moving in the wrong direction," while the labor market "is currently quite good." She expressed skepticism about whether the price increases driven by tariffs are merely a temporary phenomenon. St. Louis Fed President Alberto Musalem also pointed out that businesses are "testing" their pricing power This concern also exists beyond the Federal Reserve. Michael Strain, an economist at the American Enterprise Institute, believes that Powell's remarks were "surprisingly dovish," underestimating inflationary pressures in the economy while overestimating the risks of a softening labor market.

He warned that cutting interest rates now could force the Federal Reserve to raise rates again in 2026, which might lead to the perception that the Fed is willing to tolerate inflation above 2%. These concerns about inflation are precisely why Powell chose a path of "moderate" rather than "aggressive" rate cuts.

Moderate Easing

Powell's cautious tone this year stands in stark contrast to his remarks at the same event a year ago. Nick Timiraos specifically noted in his analysis that last year's Powell had decisively stated, "The time for policy adjustment has come."

The fundamental difference behind this disparity is the significant change in economic fundamentals: current interest rates are a full percentage point lower than they were a year ago, while inflation is running at a higher level. This unstable situation of "high inflation and low interest rates" has forced the Federal Reserve to adopt a more restrained easing path.

For the market, this means that unless there is a significant and sharp deterioration in the labor market, do not expect the Fed to cut rates as quickly as it did last year. Mortgage rates and other borrowing costs are therefore unlikely to see significant declines.

Strain even warned that cutting rates now could force the Fed to reverse its policy direction next year and raise rates again. The risk of "cutting rates in 2025 and raising them again in 2026" could not only be politically more complicated but also damage the Fed's credibility, leading to the perception that it is willing to tolerate inflation above the 2% target.

Powell is still striving to guide the economy toward the "soft landing" he has long pursued, but as Timiraos summarized, the current "air traffic control" is clearly much more complicated. Whether his latest strategy can allow the U.S. economy to land smoothly, rather than stall or run off the runway, remains the biggest suspense in the coming months.