Shenwan Hongyuan: Powell's speech has led to a significant increase in "rate cut trades," and whether expectations can materialize depends on the September non-farm payroll and inflation data

According to the Zhitong Finance APP, Shenwan Hongyuan Securities released a research report stating that on August 22, Powell delivered a speech titled "Economic Outlook and Framework Review" at the Jackson Hole Global Central Bank Annual Meeting. Compared to the July FOMC meeting, Powell's policy tone shifted to "neutral and slightly dovish." Powell's speech led to a significant increase in "rate cut trading," with the implied September rate cut expectation in federal funds futures rising from 72% to 94%. The second half of 2025 is the "tariff verification period," with the baseline scenario being: the unemployment rate rises to the range of 4.4-4.5%, with two rate cuts within the year. The key to whether the September rate cut expectation can materialize lies not in Powell's statements, but in the non-farm payroll report on September 5 and the inflation data on September 11; the sufficient condition for the second rate cut expectation to materialize may be the unemployment rate rising above 4.4%.

(1) Macroeconomic and Monetary Policy Stance: Stagflation Risks Coexist, Based on Risk Balance and Tactical Choices

Compared to the July FOMC meeting, Powell's policy tone shifted to "neutral and slightly dovish." Regarding employment, Powell's description can be summarized as: a "fragile balance" under weak supply and demand, with the downside risk to employment tending to increase; (2) Regarding inflation, Powell believes that the inflation caused by tariffs is clearly visible but may be "one-time," indicating that short-term attention should still be paid to the transmission and diffusion of tariffs.

In terms of monetary policy stance, Powell believes that the Federal Reserve needs to strike a balance amid "stagflation risks" (coexisting inflationary and employment downside risks), acting cautiously and adapting as needed. As the policy rate is in a restrictive zone, the Federal Reserve needs to adjust its policy stance in response to changes in baseline outlook and risk balance, and it is clearly adjusting towards a more accommodative direction.

(2) Long-term Monetary Policy Framework Returns to Normalization: Long-term 2% Inflation Target + Broad Maximum Employment Goal

In the second part of the speech, Powell introduced the revision of the Federal Reserve's long-term monetary policy framework (or strategy). At the Jackson Hole Annual Meeting in August 2020, under the constraint of the "effective lower bound," Powell led the revision and release of a new framework, proposing an "average inflation targeting" approach, with greater focus on employment "shortages" and inflation "compensation."

The 2025 "statement" is a "post-confirmation" of the Federal Reserve's monetary policy strategy over the past period. The macro background for the 2020 "statement" revision is: based on the horizontal "Phillips curve," the dual mandate is complementary, and the Federal Reserve can balance inflation and employment goals. However, currently and in the future, the U.S. is facing the "stagflation" dilemma, and the Federal Reserve must strike a balance between the dual objectives.

(3) The "Expectation Gap" of Federal Reserve Rate Cuts and Its Adjustment Risks: September Rate Cut, Then What?

Powell's speech led to a significant increase in "rate cut trading." The implied September rate cut expectation in federal funds futures rose from 72% to 94%. The number of rate cuts within the year increased from 1.9 to 2.2, and the number of rate cuts before the end of 2026 rose from 5.0 to 5.3.

The second half of 2025 is the "tariff verification period," and our baseline scenario is: the unemployment rate rises to the range of 4.4-4.5%, with two rate cuts within the year. The key to whether the September rate cut expectation can materialize lies not in Powell's statements, but in the non-farm payroll report on September 5 and the inflation data on September 11; The sufficient condition for the second interest rate cut expectation to materialize may be an unemployment rate rising to above 4.4%.

The "expectation gap" for the Federal Reserve's interest rate cut mainly pertains to 2026. The macro scenario for the first half of 2026 may be: inflation remains sticky (staying high or the downward slope not meeting expectations), economic stabilization and recovery, and a declining unemployment rate. Against this backdrop, pricing in three interest rate cuts in 2026 may be overly optimistic, and attention should be paid to the upward movement of medium to long-term U.S. Treasury yields and the "reversal" risk of the U.S. dollar exchange rate