Editor's note: Powell noted that the U.S. economy continues to demonstrate resilience against a backdrop of high tariffs and tightened immigration policies. However, significant slowdowns have emerged in the labor market and economic growth. He stated that while inflation remains a concern, rising risks in the job market could lead the Fed to consider cutting interest rates in September. So, how will Powell's statements impact the trajectory of future Fed rate cuts?
【Anchor】Hello everyone, welcome to DDN Business Insider. I am Yunfei Zhang. The global central bank governors' annual meeting took place from August 21 to 23. Fed Chair Jerome Powell delivered remarks at the event.
Powell noted that the U.S. economy continues to demonstrate resilience against a backdrop of high tariffs and tightened immigration policies. However, significant slowdowns have emerged in the labor market and economic growth. He stated that while inflation remains a concern, rising risks in the job market could lead the Fed to consider cutting interest rates in September.
So, how will Powell's statements impact the trajectory of future Fed rate cuts? To discuss this topic, we have invited Qin Tai, Deputy Director and Chief Macro Analyst at Huafu Securities Research Institute, Chen Jiulin, Secretary-General of the Central Advisory Expert Group's Financial Committee, and Huang Zhuowei, Chief Macro and Real Estate Analyst at Guozheng International Research Department, to provide their insights. Welcome, everyone!
【Anchor】Mr. Huang, what is your view on Powell's speech?
【Huang】He explicitly mentioned that the Fed has two main objectives: one related to employment and the other concerning inflation. Historically, these goals have been given roughly equal weight. However, last night he indicated that there seems to be a subtle change in this parallel status. This shift could affect their stance on interest rate policy, suggesting that the previously stable trend in employment may be showing signs of gradual deterioration based on recent data. This could lead to a change in their attitude towards interest rate policy, shifting from maintaining a high-rate policy to possibly adopting a more neutral stance. In other words, a significant interest rate cut is now a distinct possibility.
【Anchor】However, there is also a sentiment in the market suggesting that even if the Fed cuts rates in September, internal divisions within the Fed could widen. This could lead to increased uncertainty in future monetary policy paths and potentially heighten market volatility. What are your thoughts on this, Mr. Chen?
【Chen】The Fed has long held differing views internally regarding monetary policy, with hawkish and dovish perspectives. Historically, it has been challenging to reach a complete consensus during policy adjustments. If a rate cut occurs in September, increased divisions within the Fed are almost inevitable. This is due to the varying assessments among officials regarding the current state and future direction of the U.S. economy, as well as their differing focuses on inflation and the labor market. Such divisions can make the future monetary policy path unpredictable. For instance, if some officials maintain that inflation remains the primary issue while others believe the softening labor market requires more attention, there will be disagreements on the pace and extent of any future rate cuts. This uncertainty will increase, leading to heightened market volatility, making it difficult for investors to gauge the market's direction. As a result, capital flows may become more cautious and disorderly, with various asset prices experiencing significant fluctuations.
【Anchor】Now, Mr. Qin, what is your assessment of the Fed's potential path for interest rate cuts?
【Qin】The recovery trend in the U.S. core inflation has been confirmed, which may limit the Fed's capacity to cut rates. Despite a month-over-month decline in energy prices, core durable goods and core services have risen concurrently, pushing U.S. core CPI higher again. The strong momentum of rising inflation could further restrict the Fed's room to lower rates. In July, the core CPI rose slightly by 0.1 percentage points to 3.0% year-over-year, with the month-over-month increase being the second highest since April 2024. Against a backdrop of falling energy prices, the significant rebound in core durable goods and core services prices may indicate that the current rise in core CPI will be strongly supported. The year-on-year increase in core CPI highlights the transmission of tariffs on goods inflation, while the cooling labor market has not influenced inflation. In the current high-interest-rate environment, July rents rose by 0.24% month-on-month (MoM), which, while a slight increase from June's low point, remains weak overall, limiting a larger rebound in core CPI. In summary, the path of recovery for core inflation in the U.S. has been confirmed, primarily driven by previous increases in tariff rates. The effects of recent large-scale fiscal expansion on the income of U.S. residents and businesses have yet to materialize, suggesting that future inflation rebounds may gain stronger momentum, further limiting the Fed's ability to cut rates.
【Anchor】Yes, Mr. Huang, how do you assess the future path of the Fed's interest rate cuts?
【Huang】There was already a prevailing view in the market regarding interest rate cuts. From the statements made during the July meeting, it was clear that Powell and two other board members supported a rate cut. Recently, we have also seen some board members resign early, leading to a shift in the composition of the board. Therefore, looking at the voting support, it appears more certain that there is backing for a rate cut path. Additionally, there have been reports of threats towards Booker, indicating a more dovish stance from the Fed. Overall, it seems that the Fed's actions will increasingly lean towards supporting a rate cut. Following Powell's dovish remarks last night, I believe the market may start pricing in a faster path for rate cuts not only for this year but also for next year.
【Anchor】Mr. Chen, what is your perspective on this?
【Chen】Considering the current backdrop of a soft landing for the international economy, there may be several scenarios for the Fed's future interest rate cuts: First, the Fed might pause rate cuts until there is a significant economic shock that prompts a new rate cut cycle. If the U.S. economy remains resilient in 2025 with stable inflation, but the final hurdles to combating inflation prove difficult, this scenario could arise. Second, there could be gradual rate cuts, with the timing of cuts depending on subsequent inflation data and changes in the labor market. There could be a gradual rate cut cycle that is not continuous and might include small rate hikes in between. If Trump's policy package quickly boosts inflation, the Fed may raise rates slightly before returning to cuts.
【Anchor】Now, Mr. Qin, do you believe the recent softness in the U.S. labor market will become a decisive factor driving rate cuts?
【Qin】The average hourly wage in the labor market has remained stable for three consecutive months, with a slight increase of 0.1 percentage points to 3.9%. Additionally, the new job growth in June was revised up by 0.1 percentage points. The data structure indicates that the U.S. labor market may have experienced some impact from the increased tariffs in the short term. However, it's also important to note that a new round of fiscal expansion legislation has already passed in Congress. From a medium- to long-term perspective, on one hand, U.S. residents' incomes will likely rise due to fiscal subsidies, while on the other hand, domestic investment and production will likely create more jobs due to favorable tax policies. Therefore, the short-term impacts on the labor market are expected to dissipate as the fiscal expansion program progresses. Future increases in wage growth may lead to rising prices in non-durable goods and services consumption, which are closely tied to wages. The current trend of simultaneous cooling on both the supply and demand sides of the labor market is still characterized by strong temporary features and has not yet significantly affected inflation data. As the fiscal expansion program steadily advances and the U.S. reaches agreements with major trading partners, the labor market is likely to show a significant probability of returning to a warming trend. In the short term, fluctuations in the U.S. labor market are not the sole influence on the Fed's decisions. Powell has previously emphasized that if the labor market cools without significantly impacting inflation, the Fed is unlikely to implement substantial rate cuts.
【Anchor】 Ok, Mr. Chen, what do you think?
【Chen】The U.S. labor market has indeed shown signs of weakness recently. For instance, in July, the U.S. unemployment rate rose by about 8%, affecting 800,000 people, and the non-farm payroll added only 73,000 jobs that month, far below expectations. However, this alone may not become a decisive factor in driving rate cuts. While the labor market is a critical consideration for the Fed, they will also take into account other economic indicators such as inflation. The current stickiness of U.S. inflation remains, with a potential rebound trend, and some officials are concerned about inflation issues. Therefore, simply having a weak labor market does not necessarily trigger a rate cut. Only when the degree of weakness in the labor market aligns with inflation data to indicate that the economy requires stimulus through rate cuts might it become a key driving factor for such action.
【Anchor】Considering that the possibility of the Fed cutting rates in September is still uncertain, the market seems to have priced in a 25 basis point cut for that month based on the trends in U.S. stocks, the dollar, and Hong Kong stocks. If the Fed does go ahead with a 25 basis point rate cut, how might the market react, Mr. Qin?
【Qin】Overall, it is expected that the continued interpretation of a hot economic cycle on both the supply and demand sides will support the upward path of U.S. core inflation, which still faces significant upward pressure. Therefore, in order to uphold the long-term inflation target of 2% and maintain the independence and credibility of the Fed, the scope for rate cuts may be considerably limited. At that point, the divergence in monetary policy directions among major developed economies could lead the U.S. dollar index to gain significant rebound momentum as it returns to a pricing mechanism based on real interest rate differentials.
【Anchor】Yes, Mr. Huang, how do you foresee changes in the global market?
【Huang】From a broader perspective, rate cuts will indeed have a stimulating effect on the market. However, if the cuts are too aggressive, for example, if there is a tendency to cut by 50 basis points or more in September, it could raise concerns about potential underlying economic issues. A 25 basis point cut might be the best choice for overall capital market allocation. If there is a significant rate cut, the U.S. dollar will likely continue to weaken, but this also depends on the interest rate policies of other countries, so we need to make more precise judgments based on relative interest rate levels. As it stands, the trend of a weakening dollar is quite significant.
【Anchor】Yes, Mr. Huang, how do you foresee changes in the global market?
【Huang】Traditionally, rate cuts are favorable for certain assets like gold, as gold does not yield interest. A rate cut would reduce the opportunity cost of holding gold, making it more attractive. In addition to gold, investors should pay attention to sectors that are sensitive to interest rates. Real estate, for example, is traditionally sensitive to interest rates and should be on investors' radars. Moreover, aside from the rebound in U.S. stocks, Hong Kong stocks are also worth watching. Given that Hong Kong stocks have a valuation advantage, a rate cut in the U.S. could positively influence global liquidity, which, in turn, would have a favorable impact on Hong Kong stocks as well.
【Anchor】OK, thank you. That's all for this episode. Remember to follow us on YouTube or download our APP. I'm Yunfei Zhang, thanks for watching, and see you next time.
Anchor: Laura Cheung | Edited: Kelly Yang, Laura Cheung, Rachel Liu | Translate: Kato Ip | Proofread: Chris Liu
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