Powell's Dovish Turn: The Fallout from the 2025 Jackson Hole Meeting
Welcome back, Master. The Jackson Hole meeting, which shook global financial markets, concluded on August 23, 2025. As you requested, the three of us will now begin our discussion on the impact of Fed Chair Jerome Powell's speech and what it signifies for the market.
Master, I will begin by briefing you on Chair Powell's remarks from yesterday's (the 22nd) Jackson Hole Symposium and the resulting market data. As it was the final Jackson Hole speech of his term, it drew significant market attention.
- Powell's Key Remarks: Powell diagnosed the U.S. economy as being in a "challenging situation." He specifically described the labor market as being in a "strange equilibrium" where "both demand and supply are noticeably slowing," and warned that "the downside risks to employment are increasing." He added that if this risk materializes, it could quickly lead to a surge in layoffs and a rise in the unemployment rate.
- Rate Policy Signal: He stated, "With policy in restrictive territory, it may be appropriate to adjust the policy stance, considering the shifting balance of risks." This was interpreted by the market as a very strong signal that a rate cut could occur at the September FOMC meeting.
- Relevant Economic Indicators: The backdrop for these remarks is recent economic data. GDP growth in the first half of 2025 slowed to 1.2%, half the rate of 2024. The July unemployment rate stood at a somewhat high 4.2%, and employment growth has also slowed significantly. On the other hand, while the July Consumer Price Index (CPI) was stable at 2.7% year-over-year, the core CPI actually rose slightly to 3.1%, showing that inflation concerns have not completely disappeared.
- The Market's Reaction: Immediately following Powell's remarks, the market cheered. The S&P 500 index jumped over 1.2%, and the Dow Jones and Nasdaq indices also rose sharply. The 2-year Treasury yield, which is sensitive to Fed policy, fell to 3.72%, and the value of the dollar also declined. According to the CME FedWatch Tool, the market is now pricing in a nearly 90% probability of a rate cut in September.
The market is interpreting this as the "return of the dovish Powell."
My Lord! Did you hear that?! This isn't just any dove; it's the arrival of a 'golden dove' bringing bundles of cash to the market! My heart is soaring vertically, just like the Nasdaq chart! Devilish!
Let me interpret all that stiff data Myu-tan talked about! This is the Fed finally declaring, "We're going to give the economy a vitamin shot before it gets sick!" Can't you hear the sound of the heavy shackles of 'rate hikes' that have been holding the market back finally being unlocked?!
Just think about it! What happens when interest rates go down? Companies can borrow money more cheaply to invest, and investors like us will move our money from savings and bonds into the stock market! A 'party time' where new money—liquidity—pours into the market is starting all over again!
Mika-pi will probably pour cold water on this, talking about unstable employment or slowing growth, but that's just giving the Fed a 'reason' to cut rates! The really important thing is 'will they cut rates,' and Grandpa Powell himself stamped his approval, saying they 'can adjust'!
My Lord! This isn't something to worry about as a recession; you should see it as the starting signal for a new bull market! Now is the time to be brave and increase your allocation to risk assets! You'll regret it dearly if you miss this chance!
💖 Kurumi's Heart-o-Meter Score: 95/100
"The countdown for the rocket launch has begun! Fasten your seatbelts tight!"
Kurumi, have you ever considered that the launchpad might collapse before the rocket even takes off? You are caught up in the festive mood and are overlooking the most crucial fact.
Why did the Fed suddenly signal a rate cut? It's not to give the market a gift, as Kurumi suggests. It's because, as Powell said himself, "the downside risks to employment are increasing" and "GDP growth has slowed." In other words, a powerful warning light has turned on, indicating that the engine of the U.S. economy is cooling down. A rate cut is more of a 'reactive measure' to this warning light.
I see several dangerous scenarios here.
First, the possibility of being 'too late.' Powell warned that employment risks could 'materialize quickly.' If the economy has already entered the early stages of a deeper recession than we think, a 0.25% rate cut may not be enough to reverse the trend. The market may be cheering for a 'liquidity party,' only to belatedly realize that the house where the party is being held (the real economy) was poorly constructed.
Second, the resurgence of inflation. Have you forgotten? The core CPI for July actually rose. Powell himself admitted that "the risks to inflation are still tilted to the upside." What if the Fed hastily cuts rates, only for the inflation we thought was subsiding to rear its head again? The Fed could commit the worst kind of policy error by having to raise rates again, and its credibility with the market would plummet.
Third, the market's overreaction. The market is now pricing in a September rate cut as if it were a foregone conclusion. If the September FOMC results in a 'hold' decision, or if Powell makes hawkish remarks again, the great expectations could lead to a flood of disappointed selling and a sharp market downturn.
The market is currently ignoring the essence—'they are cutting rates because the economy is getting worse'—and is only celebrating the result—'they are cutting rates.' This is a very dangerous optical illusion.
🚨 Mikael's Risk Score: 80/100
"Giving a painkiller to a sick patient doesn't cure the disease. The pain can be even greater when the effect of the painkiller wears off."
〔 Final Briefing 〕
Master, I will summarize the results of our discussion.
Growth Potential (Kurumi)
- A Green Light for Liquidity: The Fed's policy pivot is a starting gun for new capital to flow into the market, which is the biggest boon for risk assets like stocks!
- Proactive Economic Stimulus: The Fed acting before the economy falls into a full-blown recession raises hopes for a soft landing and can improve investor sentiment!
- The Start of a Rate-Cut Cycle: The expectation that this rate cut won't be a one-off event but will lead to further cuts can drive a sustained rise in asset prices.
Potential Risks (Mikael)
- The Reality of Economic Slowdown: The fact that the reasons for the rate cut are 'slowing growth' and 'employment instability' could lead to worsening corporate earnings, posing a fundamental threat to the asset market.
- Possibility of Inflation's Return: A premature rate cut when inflation is not yet fully contained could trigger higher price increases, putting the Fed in a difficult position.
- Burden of Priced-in Expectations: The market's high expectations for a rate cut are already priced in, which could provide an excuse for a sharp correction if the actual policy falls short.
Key Data (Mew)
- Powell's Remarks Summary: Emphasized downside risks to the labor market, signaling an adjustment to the tightening policy. (August 22, 2025)
- Market Reaction: Stocks surged (S&P 500 +1.2%), Treasury yields fell (2-year at 3.72%), and the dollar weakened.
- Key Economic Indicators: Slowing GDP growth (1.2% in H1), somewhat high unemployment rate (4.2% in July), and still-unsettled core inflation (3.1% in July).
- Outlook: The market is now treating a 0.25%p rate cut at the September FOMC meeting as a certainty.
Master, Powell's Jackson Hole speech was like welcome rain that quenched the market's long-held expectations. As Kurumi said, expectations for a new liquidity-driven market are dominating sentiment. However, as Mikael warned, we must not forget that this rain is actually falling from the dark cloud of an 'economic slowdown.' Looking ahead, the market is expected to engage in a fierce tug-of-war between celebrating the Fed's 'gift' and confronting the 'economic reality' that necessitates it. The upcoming employment and inflation data before the September FOMC meeting will be the most critical variables in determining the outcome of this tug-of-war.