Review of Powell’s speech in the early morning: neutral and slightly dovish, but it also reveals potential "unstable variables"!
While I was at the airport, I quickly surfed the Internet and learned from the big guys what they thought of Powell’s speech in the early morning while my computer still had some power. I also briefly read the entire speech and would like to share my personal views.
First, this speech is generally considered to be neutral and slightly dovish, but it contains a potential "unstable variable". On the one hand, this variable can smoothly lead to a rate cut in September, but if problems occur, it can also be used as a reason not to cut interest rates in September.
This unstable variable lies in balance, the balance between inflation and the labor market, the balance between inflation and the economy and the labor market, and also the balance of risks.
In what I wrote before going to bed in the early morning, I mentioned several aspects that need to be paid attention to in Powell’s speech in the early morning, his assessment of the labor market, his requirements for August and September, and the details of the September interest rate cut in this speech.
1. This speech stated that the cooling of the labor market is still within the normal threshold and will not trigger more speculation about economic recession for the time being.
2. The September interest rate cut is on the agenda, which is in line with the market's previous expectations, but there is no substantive content, so after the speech, the probability of a September interest rate cut has not increased.
3. Regarding the goals for August and September, Powell himself mentioned the balance between the labor market and inflation, or the risk balance between the labor market and inflation while inflation is under control.
4. The Federal Reserve pays attention to data, but not to a single piece of data. Instead, it focuses more on the balance between data.
5. Focus on where there are abnormalities in inflation and the labor market. In other words, data weighting is not a fixed idea, but a focus based on variables in actual conditions.
Through the content of this speech that I have paid attention to above, we can actually clearly see Powell's actions. He paid attention to data before, and then paid attention to the balance between data. In fact, the core is still trying not to cut interest rates as much as possible without disappointing the market with the interest rate cut.
Previously, the focus was on inflation. As inflation decreased, the reason for a rate cut was reached. Then, the focus was on employment. The unemployment rate of 4.1% also met the need for a rate cut. At this time, Powell put forward a new requirement: balance.
What is balance? I have said many times before that the Fed's most desired state is:
Inflation remains relatively stable and controllable around 2%, stable economic growth does not trigger recession risks, the job market cools but does not cause short-term tension in the job market, consumer desire decreases but can still drive positive domestic demand, workers' wage growth slows down, and the price growth rate slows down rapidly. At the same time, inflation control comes from the supply side rather than the demand side, and financial markets are stable, etc.
This set of things seems simple, but it is extremely difficult to achieve. In fact, this is what I understand as the so-called balance that Powell wants. This balance can be big or small. On a big scale, it is what I call economic balance and healthy development of various data. On a small scale, it means that inflation slows down and unemployment does not increase.
So I think that the balance that Powell mentioned many times may still be a reason for not cutting interest rates in September.
I don’t think there will be no rate cut in September, but I think Powell is waiting for something and is worried about something. If this problem is not solved, he can continue to delay the rate cut in September by using the “balance theory”. At the same time, the market will not be completely disappointed with the rate cut.
If the problems that Powell is worried about are solved, then in September, the Fed can still use the current data to perfectly balance and start cutting interest rates. As for what problems Powell is worried about? Is it from the economy? Or politics? This is not known for the time being, and this topic is a bit broad, so I will not elaborate on it here.
Summarize:
Regarding the interest rate cut, we initially focused on inflation and then on employment. However, we will gradually discover that Powell is leading the market's expectations and leading everyone by the nose. The title of expectation management master is not given for nothing, and the objects of their expectation management are the central banks of various countries. Therefore, for retail investors and financial markets, being managed by expectations is a foregone conclusion.
Again, instead of studying what reasons Powell needs to cut interest rates, it is better to think about what he is afraid of. Once the thing he is worried about no longer exists, it may be an important reason for cutting interest rates.
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