Behind the Rate Cut Frenzy: Is the Market Misreading Powell’s “Precautionary” Signal?

TradingKey - Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole symposium was widely interpreted as a clear signal that a September rate cut is all but certain, sending U.S. equities to new highs. Yet a deeper analysis reveals that this so-called “dovish” message was not an unconditional commitment to rate cuts, but rather a cautious warning about rising economic risks.

As economist Jonathan Levin noted in a Bloomberg column, Powell’s core message was this: if the Fed cuts rates, it won’t be because inflation is under control — but because the economy may already be weakening, requiring preemptive action to avoid a hard landing.

The Fed now faces an unprecedented policy dilemma. On one hand, the labor market shows a “strange balance” — unemployment remains low, but hiring activity and labor force participation are both slowing. Powell explicitly stated that “downside risks to employment are rising.”

On the other hand, while inflation has cooled from its peak, it still runs above the 2% target. Moreover, the Trump administration’s tariff policies could push consumer prices higher in the coming months, adding persistent upside pressure.

Powell emphasized that monetary policy is “not on a preset path,” underscoring that future decisions will remain highly data-dependent. While he acknowledged that rates are approaching a “neutral level” and that the Fed can now “proceed carefully,” he stopped short of committing to any specific easing trajectory.

Notably, the July FOMC meeting saw two voting members dissent — the first such split in over 30 years — highlighting deep internal disagreements about the economic outlook.

Levin argues that the market may be overly optimistic. A rate cut would likely be a defensive move in response to weakening growth, not a victory lap for inflation control. In fact, GDP growth has slowed significantly in the first half of 2025, a reality at odds with the stock market’s strong performance.

Nonetheless, Gang Liu of CICC points out that the equity rally is not driven solely by rate cut expectations. Instead, it reflects real improvements in fundamentals, including robust AI investment, fiscal stimulus from the “Big Beautiful Act” spending expansion, and rate cuts’ positive impact on traditional demand.

Moreover, Powell skillfully sidestepped President Trump’s repeated calls for “aggressive rate cuts,” preserving the Fed’s independence.

Looking ahead, the Fed may begin easing as early as September — but the pace is likely to be slower and more data-dependent than current market expectations. The delicate balancing act between recession risks and persistent inflation is far from over. The market’s celebration may, in hindsight, have come too soon.