"Based on the data we have, it is fair to say that since our meeting in September four weeks ago, the employment and inflation outlooks do not seem to have changed much." This statement by Federal Reserve Chairman Jerome Powell on October 14 at the National Association for Business Economics annual meeting was interpreted by the market as a clear signal for an interest rate cut in October.
In the context of a partial government shutdown in the U.S. leading to missing key economic data, Powell still pointed out that "the downside risks to employment have increased," while emphasizing that the Federal Reserve's interest rate policy "does not have a risk-free path." This speech set the tone for the Federal Reserve's monetary policy meeting on October 28-29 and revealed that U.S. monetary policymakers are walking a tightrope filled with uncertainty.
With economic data missing and the policy path unclear, the Federal Reserve is searching for reasons to cut interest rates in the fog.
01 Policy Shift: Cooling Labor Market Becomes Core Logic for Rate Cuts
The core focus of Powell's speech was undoubtedly the noticeable cooling of the U.S. labor market. He repeatedly mentioned "slower hiring rates" and pointed out that "employment growth has significantly slowed."
● Risk Balance Shift: Powell clearly stated, "the downside risks to employment have increased, changing the Federal Reserve's assessment of the risk balance." This judgment directly led to a tilt in the Federal Reserve's policy balance, shifting from an absolute priority on "suppressing inflation" over the past two years to a more balanced view of employment and inflation risks.
● Insufficient Data Support: Although the official employment data for September was delayed due to the government shutdown, Powell noted, "existing evidence shows that layoffs and hiring numbers remain very low." He specifically mentioned that the number of job vacancies has further declined, "likely reflecting in the unemployment rate."
● Increased Uncertainty: Powell admitted that he would not attempt to precisely determine the breakeven rate for employment, as its "standard error may itself be as high as 50,000, even suggesting that the 'equilibrium level' of job creation may have 'fallen below zero.'"
02 Data Dilemma: "Blind Flying" Decision-Making Challenges Amid Government Shutdown
The upcoming Federal Reserve monetary policy meeting faces a rare challenge—key economic data is missing due to a partial shutdown of the U.S. federal government.
● Limitations of Alternative Data: Powell candidly stated during the Q&A session that due to the government "shutdown," data such as the non-farm payroll report is missing, and everyone is looking at the same private sector employment data. However, he emphasized that "state-level employment data and the ADP employment report cannot replace the gold standard that constitutes official statistics."
● Monitoring Mechanism Activation: In light of this dilemma, Powell stated, "the Federal Reserve has its own contacts and data sources to monitor the health of the U.S. economy." He specifically mentioned that this information will be summarized in the upcoming "Beige Book."
● Future Risk Warning: Powell warned, "if the government shutdown continues and the October data is delayed, the Federal Reserve will begin to miss data, and the situation will become more severe." This statement reveals the "blind flying" risks that the October monetary policy meeting may face.
03 Inflation Perspective: Tariffs Drive Prices Rather Than Broad Pressures
Despite the cooling trend in the labor market, inflation remains a policy consideration that the Federal Reserve cannot ignore. Powell attempted to alleviate market concerns about inflation in his speech.
● Attributing to Tariff Policy: Powell pointed out, "the rise in commodity prices mainly reflects tariffs, rather than broader inflationary pressures." He believes that "U.S. tariff policy has caused a certain degree of increase in commodity prices, but there are almost no signs of 'broader inflationary pressures.'"
● Stable Long-Term Expectations: At the same time, Powell emphasized that "long-term inflation expectations remain aligned with the Federal Reserve's 2% target," providing a basis for the Federal Reserve to continue cutting rates even when inflation is still above the 2% target.
● Art of Risk Balance: Powell admitted, "if the Federal Reserve acts too quickly, it may undermine the anti-inflation task." However, he also warned that "acting too slowly may put pressure on the labor market," highlighting the policy dilemma the Federal Reserve faces while walking a tightrope.
Table: Key Points of Powell's Speech Comparison
Policy Aspect
Main Statement
Policy Implication
Interest Rate Policy
"There is no risk-free policy path"
Implying continued cautious rate cuts
Labor Market
"The downside risks to employment have increased"
Policy focus shifting towards employment
Inflation Judgment
"Inflation mainly reflects tariff factors"
Clearing obstacles for rate cuts
Balance Sheet Reduction Process
"May be close to stopping balance sheet reduction in the coming months"
Liquidity tightening cycle nearing its end
04 Balance Sheet Reduction Process: Quantitative Tightening Set to End
In addition to interest rate policy, Powell also brought important news regarding the Federal Reserve's balance sheet: the quantitative tightening policy that has lasted for several years may soon come to an end.
Clear Time Frame: Powell stated, "the Federal Reserve's long-standing plan is to stop action when reserves are slightly above the level deemed adequate by the Fed. We may be approaching this level in the coming months." This statement provides the market with clear expectations.
Learning from Historical Lessons: Powell acknowledged that there are signs showing liquidity is gradually tightening. He specifically mentioned that the Federal Reserve's plan indicates they will take cautious measures to avoid a situation like the monetary market tension in September 2019.
Flexible Policy Space: Powell believes that "the Federal Reserve has a more 'flexible' space regarding the size of its balance sheet." This statement suggests that the Federal Reserve may flexibly adjust its balance sheet policy based on market conditions in the future.
05 Market Reaction: Rate Cut Expectations Heat Up, U.S. Stocks Rebound
After Powell's speech, financial markets quickly reacted, with expectations for a rate cut in October sharply rising.
● Expectation Probability Soars: According to the CME "FedWatch" tool, the probability of the Federal Reserve cutting rates by 25 basis points in October reached 97.3%; the probability of a cumulative 50 basis point cut by December is as high as 93.5%.
● U.S. Stocks Volatile: In the overnight U.S. stock market, the three major indices collectively rebounded after hitting lows. The Dow Jones Industrial Average turned positive, closing up 0.44%; the Nasdaq's decline narrowed from 2.12% to 0.76%; the S&P 500 index fell 0.16%. This trend indicates that Powell's dovish remarks somewhat alleviated market concerns about the economic outlook.
● Expert Interpretations Align: Michael Feroli, Chief U.S. Economist at JPMorgan, stated that Powell's latest remarks "reinforced expectations for further rate cuts." Julia Coronado, founder of MacroPolicy Perspectives, bluntly stated that a rate cut by the Federal Reserve in October is "a done deal."
Table: Changes in Probability of Federal Reserve Rate Cuts from October to December
Time Frame
Unchanged
Cut by 25 Basis Points
Cut by 50 Basis Points
October Meeting
2.7%
97.3%
-
Cumulative December
0.1%
6.4%
93.5%
Data Source: AiCoin Official Website, Eastmoney
Conclusion
Powell's speech was a precise policy guide amid data fog.
He paved the way for an interest rate cut in October while also setting a time frame for the conclusion of the balance sheet reduction.
As the October 30 monetary policy meeting approaches, the Federal Reserve will perform a high-difficulty "tightrope act" in the face of incomplete data. Against the backdrop of a slowing global economic growth, every decision made by the Federal Reserve will resonate with global market nerves.
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