Zhongjin: It is not suitable to overly interpret Powell's "dovish" remarks.

CICC released a research report stating that on August 22, the speech by Federal Reserve Chairman Powell at the Jackson Hole meeting was seen by the market as a "doveish" signal of monetary easing. It is not appropriate to interpret Powell's remarks as overly "dovish;" his doveish comments are more of a "conditional response" to the recent downward revision of non-farm payroll data and do not constitute an effective guarantee of the number and extent of interest rate cuts within the year. Even if the Fed cuts interest rates by 25 basis points in September, it does not mean that this will be the start of a series of monetary easing measures. On the contrary, in a situation where employment and inflation risks coexist and policy objectives are contradictory, it is necessary to fully recognize the challenges facing the Federal Reserve. If "stagflation" causes policymakers to struggle, market volatility will also further intensify. CICC believes that under significantly higher tariff rates and tightened immigration policies, employment and inflation risks coexist. If inflation risks surpass employment, Powell can still put a stop to rate cuts using the same "reaction function." Therefore, the market should not view Powell's speech as the start of a series of easing measures, but should recognize the challenges facing monetary policy when employment and inflation targets are conflicting. If tariffs and immigration policies further elevate "stagflation" pressures, putting the Federal Reserve in a dilemma, there will not be a genuine monetary easing in that case. Market risk preferences may decrease, and volatility may increase as a result. Powell's speech at the Jackson Hole meeting stated, "Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance." This statement was interpreted by the market as "doveish." After the speech, the probability of a rate cut in September priced by the interest rate futures market rose from 75% to 89%. Firstly, Powell's remarks did not announce a rate cut in advance, nor did he provide strong guidance on the extent and sustainability of rate cuts; he simply clarified the Federal Reserve's policy "reaction function" to the market. Powell emphasized at the beginning of his speech that the balance of risks seemed to be shifting, implying that the downside risks to employment were outweighing the upside risks to inflation. He then stated that under the dual impact of tariffs and immigration policies, labor supply and demand are both slowing down simultaneously, leading to an increase in downside risks for employment. At the same time, the impact of tariffs on prices is already evident, but the reasonable baseline scenario is that these effects will be temporary and the price rise will be one-time. Therefore, after weighing both risks, Powell believes that adjusting the policy stance would be appropriate. Powell's intention is that if the risks to employment outweigh those to inflation, the Federal Reserve would lean towards cutting rates. However, if the inflation risks surpass those to employment, then the Federal Reserve could still halt rate cuts using the same "reaction function." CICC believes that the latter scenario is not impossible: currently, the United States faces significantly higher tariffs and tightened immigration policies, both of which have the effect of suppressing supply and raising prices, although the current impact is still relatively mild. If the subsequent rise in inflation rates further deviates from the Federal Reserve's 2% inflation target, then pausing rate cuts would be a more appropriate choice. In fact, the Federal Reserve also unveiled a revised monetary policy framework for 2025 at this year's Jackson Hole meeting. The new framework abandons the previous "average inflation target" in favor of a more balanced and symmetrical risk approach, focusing on the deviation from policy objectives and the expected duration of that deviation. The more severe the deviation and the longer the potential impact is expected to last, the stronger the Federal Reserve's response will be. Based on this framework, the significant downward revision of non-farm payroll numbers in May and June made employment a significant "deviation point," prompting a consideration of rate cuts. However, if subsequent inflation targets also deviate, then the Federal Reserve will have to reconsider the importance of each factor and may change its stance on rate cuts. Furthermore, compared to the Jackson Hole meeting in 2024, Powell's "doveish" indications this time clearly lacked confidence. In his speech in August 2024, Powell pointed out that the downside risks to employment had increased, even though the rise in the unemployment rate reflected a significant increase in labor supply and a slowdown in hiring. At the same time, inflation risks had eased, and his confidence in inflation returning to the 2% target had increased. Therefore, he believed that the time had come for policy adjustment, and the direction of adjustment was clear. In CICC's view, these statements reflected Powell's firm, proactive, and confident attitude towards the upcoming rate cut in September. In contrast, this time, while emphasizing the downside risks to employment, Powell also acknowledged that the impact of tariffs on prices was already evident. He further pointed out that inflation risks were tilted to the upside, while employment risks were tilted to the downside - a challenging situation. This statement is consistent with CICC's assessment of the risk of "stagflation" facing the United States. Clearly, Powell no longer has the same confidence as a year ago in inflation returning to 2%. From a fundamental perspective, the Federal Reserve lacks compelling reasons for sustained rate cuts like it did in September last year, so this time Powell's attitude towards monetary easing is noticeably more reluctant, cautious, and indicates a lack of confidence. Thirdly, Powell emphasized that the economy faces structural shocks, and monetary policy is not a panacea, implying that rate cuts may not address the root of the problem. Powell explicitly stated that the United States is facing new challenges this year, with significantly higher tariffs reshaping the global trade system, and stricter immigration policies leading to a slowdown in labor growth. Powell further pointed out that while monetary policy can stabilize cyclical fluctuations, it is largely powerless in the face of structural shocks. This is somewhat similar to CICC's view that rate cuts may not alleviate "stagflation." One or two rate cuts may not lead to substantial improvement in economic demand and could instead hasten cost pass-through by businesses, drive up consumer prices, and erode real purchasing power. In such a scenario, the economy may fall into the dilemma of stagflation caused by rate cuts, which would be a real threat. Charts 1: Federal Reserve Monetary Policy Framework Comparison Source: Federal Reserve, CICC Research Department Chart 2: Comparison of Powell's Speeches at the 2024 and 2025 Jackson Hole Meetings Source: Federal Reserve, CICC Research Department