U.S. Federal Reserve (Fed) Chair Jerome Powell on the 23rd (local time) said there is "no easy path" on the direction of future rate policy and noted he will proceed cautiously. He acknowledged the Fed is now walking a tightrope between two threats: the risk of inflation flaring back up and the possibility of a slowdown in the job market.
He then made clear the Fed will move based on solid economic data, not political considerations or a pre-set path. The remark signaled to investors who had expected aggressive cuts by year-end the possibility of "tapping the brakes."
At an economic event in Rhode Island on the 23rd, Powell described the Fed's current situation as "challenging." He said, "In the near term, inflation risks are to the upside and employment risks are to the downside," adding, "neither direction is without risk."
This is read as acknowledging a dilemma in which the two core mandates under the Fed's purview, "price stability" and "maximum employment," are colliding. He warned, "If we cut rates too aggressively, we may fail to complete the job of containing inflation and may have to reverse policy later." Conversely, he added, "If we keep tightening in place for too long, the labor market could be unnecessarily weakened."
In particular, he issued an unusually direct warning about the U.S. stock market, which has been setting new record highs in recent days. He said, "By several measures, equity prices are quite elevated." CNBC assessed that "the Fed chair directly hinted at the possibility of an overheated asset market, drawing a line under premature easing expectations."
The caution Powell showed that day reflects a significant divergence of views within the Fed over the direction of rate policy. Inside the Fed, "hawks (favoring tightening)" and "doves (favoring easing)" are locked in a standoff.
Doves, including Fed Governor Michelle Bowman, are calling for preemptive rate cuts, citing recently weakening employment indicators. Bowman recently said, "With labor market conditions deteriorating day after day, the Fed is at serious risk of merely chasing the employment curve."
Hawks, such as Chicago Fed President Austan Goolsbee, by contrast, are wary of inflation still above the 2% target. Goolsbee countered, "We should be cautious about moving too aggressively when inflation has been above target and rising for four and a half consecutive years."
In this situation, Powell faces the difficult task of striking a balance between the two sides and forging a consensus. He dismissed President Donald Trump's overt pressure to cut rates as "a cheap shot," again emphasizing the Fed's independence.
The Fed is expected to closely monitor upcoming employment and price data before deciding its next steps. The Financial Times (FT) reported, "Powell's comments shook the market's conviction that two additional cuts by year-end were a sure thing." For now, investors are focused on the Aug. 26 release of the August personal consumption expenditures (PCE) price index. Including that, key economic indicators are expected to be important clues to gauging the Fed's policy path.