CICC: It is not advisable to overinterpret Powell's "dovish" remarks

According to the Zhitong Finance APP, CICC released a research report stating that on August 22, Federal Reserve Chairman Jerome Powell's speech at the Jackson Hole meeting was interpreted by the market as a "dovish" signal for monetary easing. It is not appropriate to overly interpret Powell's remarks in a "dovish" direction; his dovish comments are more of a "conditional response" to the recent downward revision of non-farm payroll data and do not constitute an effective guarantee for the number and magnitude of interest rate cuts this year. Even if the Federal Reserve cuts rates by 25 basis points in September, it does not mean that this will be the starting point for a series of monetary easing. On the contrary, in the context of coexisting employment and inflation risks and conflicting policy goals, it is necessary to fully recognize the challenges faced by the Federal Reserve. If the economy experiences "stagflation-like" conditions, making it difficult for decision-makers to balance priorities, market volatility will further intensify.

CICC believes that under significantly higher tariff rates and tightened immigration policies, employment and inflation risks coexist. If inflation risks surpass employment, Powell can still use the same "reaction function" to halt interest rate cuts. Therefore, the market should not view Powell's speech as the starting point for a series of easing measures, but rather recognize the challenges faced by monetary policy when employment and inflation targets conflict. If tariffs and immigration policies further exacerbate "stagflation-like" pressures, leaving the Federal Reserve in a dilemma, there will not be true monetary easing. Market risk appetite may decline, and volatility will increase accordingly.

In his speech at the Jackson Hole meeting, Powell stated, "Given that policy is in restrictive territory, changes in the economic outlook and the balance of risks may warrant adjusting our policy stance." This statement was interpreted by the market as "dovish." After the speech, the pricing of the probability of a rate cut in September in the interest rate futures market rose from 75% to 89%[2].

First of all, Powell's remarks do not preemptively announce a rate cut, nor do they provide strong guidance on the magnitude and duration of rate cuts; they merely clarify the Federal Reserve's "reaction function" to the market. Powell emphasized at the beginning of his speech that the balance of risks appears to be shifting, suggesting that the downside risks to employment are surpassing the upside risks to inflation. He then stated that under the dual effects of tariffs and immigration policies, both labor supply and demand are slowing down, which increases the downside risks to employment[3]. Meanwhile, the impact of tariffs on prices is already evident, but a reasonable baseline scenario is that these effects will be temporary, and price increases will be a one-time shift in the price level. Therefore, after weighing the risks on both sides, Powell believes that adjusting the policy stance would be appropriate Powell means that when the risk of unemployment outweighs inflation, the Federal Reserve will tend to lower interest rates. However, if the risk of inflation surpasses employment, the Federal Reserve can still use the same "reaction function" to halt rate cuts. CICC believes that the latter scenario is not impossible: the current U.S. faces significantly higher tariffs and tightened immigration policies, both of which suppress supply and push up prices, although the current impact is still relatively mild. If the subsequent rise in inflation further deviates from the Federal Reserve's 2% inflation target, then pausing rate cuts would be a more appropriate choice.

In fact, the Federal Reserve also announced its revised monetary policy framework for 2025 at this Jackson Hole meeting. The new framework abandons the previous "average inflation targeting" approach's one-sided embrace of "higher inflation, more employment," and instead emphasizes a balanced and symmetrical risk, focusing on the degree of deviation between the current situation and policy objectives, as well as the expected duration of that deviation. The more severe the deviation and the longer the expected potential impact, the stronger the Federal Reserve's response will be. Based on this framework, the non-farm payroll numbers for May and June were significantly revised down, making the employment target a notable "deviation point," thus necessitating consideration of lowering interest rates. However, if the inflation target also deviates subsequently, the Federal Reserve will have to reconsider which is more important, and its attitude towards rate cuts may change.

Secondly, compared to the Jackson Hole meeting in 2024, Powell's "dovish" guidance this time shows clear lack of confidence. In his speech in August 2024, Powell pointed out that the downside risks to employment had increased, although the rise in the unemployment rate reflected a significant increase in labor supply and a slowdown in hiring. At the same time, inflation risks had eased, and he had gained more confidence in inflation returning to the 2% target. Therefore, he believed that the time had come for policy adjustments, and the direction was clear (The time has come for policy to adjust. The direction of travel is clear). In CICC's view, these statements reflect Powell's firm, proactive, and confident attitude towards the upcoming rate cut in September.

In contrast, this time, while emphasizing the downside risks to employment, Powell also admitted that the impact of tariffs on prices is now clearly visible. He further pointed out that inflation risks are tilted to the upside, while employment risks are tilted to the downside—this is a challenging situation (risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation). This statement aligns with CICC's judgment that the U.S. is facing "stagflation-like" risks (refer to the report "The U.S. Economy Faces 'Stagflation-Like' Risks"). Clearly, Powell no longer has the confidence in inflation returning to 2% that he had a year ago. Fundamentally, the Federal Reserve lacks the strong and sustained reasons for rate cuts that it had in September last year; therefore, this time Powell's attitude towards monetary easing is noticeably more reluctant, with more cautious wording, revealing his lack of confidence Third, Powell emphasized that the economy is facing structural shocks, and monetary policy has no good solutions, suggesting that interest rate cuts are not the right remedy. Powell clearly stated that this year the U.S. economy faces new challenges, with significantly higher tariffs reshaping the global trade system and stricter immigration policies leading to a slowdown in labor force growth. Powell went on to say that while monetary policy can stabilize cyclical fluctuations, it is largely powerless against structural shocks. This is somewhat similar to the view of CICC, which argues that interest rate cuts cannot alleviate "stagflation-like" conditions (refer to the report "Why Can't the Federal Reserve Significantly Cut Interest Rates?"). One or two interest rate cuts may struggle to bring about substantial improvement in economic demand, and may instead accelerate the pace at which companies pass on costs, driving up consumer prices and eroding residents' real purchasing power. At that time, the economy may fall into the dilemma of cutting into stagflation, which would pose a real threat.

Chart 1: Comparison of the Federal Reserve's Monetary Policy Framework

Source: Federal Reserve, CICC Research Department

Chart 2: Comparison of Powell's Speeches at the Jackson Hole Meetings in 2024 and 2025

Source: Federal Reserve, CICC Research Department