Powell just gave his strongest hint yet that rate cuts are coming, and investors are jubilant: ‘Stage set for parabolic Q4’

Powell letterwhich was presented at a National Association for Business Economics (NABE) event, was nominally related to the Fed’s balance sheet. However, the report concluded with a carefully crafted shift in tone: the labor market is weakening more rapidly than previously thought; Inflation is no longer the only threat; Perhaps politics finally needs to “take another step towards a more neutral stance.”

On Wall Street, there wasn’t much debate about what that meant: online investors rejoice That “Powell is dovish!”

Another encryption page exists X He exclaimed that the stage was set for a “parabolic fourth quarter.”

Powell’s comments caused an uproar Dao On Tuesday afternoon, it was up nearly 400 points after falling 600 points over the course of the day due to trade tensions.

“Powell signals the end of balance sheet reduction – QT – in September and confirms market expectations for further rate cuts in October and December,” says economist Diane Swonk. books on Investors almost certainly expect the Fed will cut interest rates by 25 basis points during its October meeting, according to CME FedWatch. tool.

the KPMG The chief economist noted that, in “classic Powell modesty,” he acknowledged that the Fed was slow to halt monetary expansion in 2021 after several rounds of post-pandemic stimulus led to higher inflation.

A shift driven by labor market risks

Indeed, the Fed has spent more than two years fighting persistent inflation Aggressive tightening cycle Since the 1980s. In a moment of rare institutional self-reflection, Powell acknowledged that the Fed kept its balance sheet expanded too long during the pandemic.

“With the clarity of hindsight, we could have — and perhaps should have — stopped asset purchases sooner,” he said.

This admission shows that Powell is keenly aware of the cost of acting too slowly — and he may now be wrong in avoiding a recession rather than crushing the last 0.9 percentage points of inflation to bring inflation down to the Fed’s 2% target.

Powell noted that the Fed’s preferred measure of inflation — core personal consumption expenditures (PCE) — is 2.9%, but said much of the recent rise in commodity prices reflects tariffs rather than intrinsic inflationary pressures. This line was not a coincidence. It takes price pressures away from monetary policy and gives the Fed cover to cut interest rates without appearing to capitulate to inflation.

For a Fed chairman who favors restraint, this was a message of intent. The battle against inflation is far from over, but the Fed has just acknowledged a new truth: jobs now matter as much as prices, and policy has to catch up.

Jobs are a bigger risk now

Powell acknowledged on Tuesday that the central bank’s dual mandate — stable prices and maximum employment — was suddenly starting to move in the other direction.

“In a less dynamic and somewhat softer labor market, downside risks to employment appear to have risen,” Powell said.

He added that salary growth has slowed sharply, participation has declined, and surveys of businesses and households show declining confidence in job availability. These are the basic economic conditions for starting a monetary easing policy.

The end of the runoff on the balance sheet

Powell added another dovish signal: ending the Fed’s balance sheet runoff, or quantitative tightening (QT), as soon as September. It was the Fed Reducing its portfolio of Treasury bonds Mortgage-backed securities are being sold at a rate of up to $95 billion per month in an attempt to drain excess liquidity from the financial system.

But Powell warned that reserves were now “gradually shrinking,” and stressed the need to avoid a repeat of the financing crisis in 2019. When interbank lending markets collapsed. To avoid repetition, he told the market exactly what it wanted to hear: the QT period was almost over, and soon more liquidity would be pumped into the market.

“We will set policy based on evolving economic prospects and the balance of risks, rather than following a predetermined path,” Powell told investors.