Market Wire: Powell Turns Dovish in Jackson Hole, Triggering Dollar Plunge

Federal Reserve Chair Jerome Powell provided a clear signal that the central bank will soon resume cutting interest rates in a speech at the Jackson Hole Economic Symposium this morning. “The balance of risks appears to be shifting,” Powell said at the central bank’s annual gathering in the Grand Teton National Park this morning, “In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation”. “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance”.

In his last appearance as chair, Powell noted the “effects of tariffs on consumer prices are now clearly visible,” and could trigger a rise in wages and consumer price expectations, but also acknowledged that these factors remained well-anchored, and observed that consumer demand is slowing—something that central bankers typically understand as an indicator that economic “slack” could grow, helping offset price pressures.

On labour markets, he was far more pointed, noting that “while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers”, and warning “This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising . And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment”.

This is a significantly more dovish message than Powell conveyed when speaking with reporters after the last Fed meeting, and delivers on the clear easing guidance that had been hoped for in some areas of the markets and in the government. Investors have doubled down on rate cut bets since July’s disappointing non-farm payrolls report, and policymakers have come under intense pressure from the Trump administration to slash borrowing costs.

Markets that had been assigning near-70-percent probabilities to a rate cut in September are now raising the odds on a move, and policy-sensitive front-end Treasury yields are punching lower. Equity indices are surging, and the trade-weighted dollar is reversing lower on a narrowing in cross-currency rate differentials.

The Fed’s next policy meeting is scheduled for September 16-17, and will come after a slew of data releases (particularly the August payrolls report and consumer inflation updates) that could help shed more light on how underlying economic conditions are evolving—or simply add to the sense of confusion currently percolating across the landscape. Expectations could shift violently in the weeks ahead and subject foreign exchange markets to several bouts of extreme volatility, but for now, investors are convinced that the Fed is well on its way toward easing policy settings.