American chairman Jerome Powell’s Nuance was lost in the markets, says Jonathan Levin

Speaking in 1987 with a Senate Committee and then the Federal Reserve chairman Alan Greenspan said: “If I seem overly clear, you must have misunderstood what I said.” I wonder if the current FED chairman Jerome Powell is thinking the same.

In a wide -awaited speech on the annual retreat of the Central Bank in Jackson Hole, Wyoming, Powell said that the economic outlook “the adapted adjustment” of the Central Bank can justify the monetary policy. The comments sent stock and bond markets that rise while traders took the comments to suggest that policy makers will certainly lower the interest rates when they then meet mid-September.

The S&P 500 index was ready because of the biggest profit since May, while the proceeds on benchmark were tumbling American treasuries, with lower loan costs in the entire economy in advance.

Lost in the party reaction of the knee shock was part of the nuance of a speech that was fundamentally about trying to balance double risks of both the labor market and inflation. Then there is the clumsiness that if the Fed lowers the rates, this can be because the economy is in trouble and it is not because it is possible due to tamping inflation.

Powell indeed acknowledged that policy makers under their double mandate have a difficult task to promote maximum employment and stable prices. Despite a low unemployment rate, the data from the labor market started to wiggle, even because the reported inflation remains slightly above the target of 2% of the FED. Here is how Powell said it (emphasis of me):

When our goals like these are in tension, our framework evokes that we balance both sides of our double mandate. Our policy percentage is now 100 basic points closer to neutral than a year ago, and the stability of the unemployment rate and other labor market measures enables us to continue carefully as we consider changes to our policy attitude. Nevertheless, with policy in a restrictive area, the baseline for views and the shifting risk balance can justify that our policy position adjusts. For a good measure, Powell added that “the monetary policy is not on a predetermined course.”

When one of the two goal variables is wild (as it was with an inflation of 9.1% in 2022, for example), it can be relatively easy for the central bank to forge consensus for policy action. But in recent months, economists and policymakers have begun to disagree about an economy that is usually fine on the basis of reversing data, but in some respects disturbing. In that context, the decision of July to keep the rates on hold of 4.25% to 4.5% rise to two dissidents of Fed Governors, the first time that has happened since 1992.

Adding the confusion is the fact that the immigration policy now curbs the supply of work, which means that it is more difficult to know exactly what level of wage growth is needed to prevent the unemployment rate to run higher. “In general, although the labor market seems to be in balance, it is a remarkable kind of balance that is the result of a clear delay in both the supply of and the demand for employees,” Powell said Friday. “This unusual situation suggests that the disadvantage risks to employment are rising. And if those risks occur, they can quickly do this in the form of sharply higher redundancies and rising unemployment.”

The main reason for FED cuts, in other words, is that policy makers are concerned about economic decline. Powell also noted that the growth of GDP in the first half of the year was approximately half of the 2024 pace, partly driven by a delay in consumer expenses – not exactly the start of a sustainable bull market in shares.

Then there are the risks for inflation. Many economists continue to worry that President Donald Trump’s rates will push the prizes in the coming months and quarters. The impact has been somewhat modest so far, because companies worked through existing stocks and some of them accepted narrower profit margins on the sale of imported goods. But for products with large ticket such as new cars, industry insiders still expect that price increases will hit later in the year when the lines of the 2026 model year come on the market.

Whether or not that is an argument for a tight monetary policy, is a source of intense debate: pigeons say that policy makers must view “one-off” price level changes and have them fade away from the data, while Haviken have been worried that the rates have lived for almost five years and that the process is not receptive to a fast and Tidy Fashion. Most economists believe that inflation expectations are a self -fulfilling prophecy, and that societies that get used to inflation as a normal part of life will find it much more difficult to eradicate.

Powell seemed to be placing himself in the price effects by the look-through camp. And in the margin that can still be a nuanced reason to read his speech as a “Dovish” bias. But he acknowledged the worries and stated that “we cannot take the stability of inflation expectations for granted.”

The perception of the speech can help Powell in some ways. In addition to his policy challenges, Powell has simultaneously parried Trump’s requirements for considerably lower rates. Trump is now also in danger of dismissing Fed Governorlisa Cook due to the accusation of potential mortgage fraud, which seemed to be aligned with a pressure campaign of the White House to get more influence on the central bank’s rate committee. In No World, Powell’s speech showed signs of play reading to Trump, who considers the stock market famous as a presidential score card.

It may well be that the market invests the Dovish-Tilt of the speech too much, or that the investors were somewhat placed in the conviction in the conviction that the tone would go in a more ragged direction. The reality was much more re -elected, but completely suitable for the occasion. Given the data that we control, the Fed sees ready to lower the rates as quickly as next month and to resume a process of feeling its way afterwards for the correct level of rates to support sustainable growth with low inflation. But the prospects remain very uncertain and the policy simple policy can continue slower than the markets expect.