Author: David Fox, Sarah Holder, Bloomberg; Translation: Baishui, Golden Finance
Finally, it’s time for rate cuts. This is what Federal Reserve Chairman Jerome Powell said in his speech on Friday at Jackson Hole, when he let the world know that the Fed will cut rates at its next meeting in September.
The following is an edited transcript of the conversation:
**Sara Hold: **On Friday morning, some of the most powerful people in the financial world gathered in a small cabin in Jackson Hole, Wyoming, to hear the latest statement from Jerome Powell, the chairman of the Federal Reserve. Bloomberg’s Mike McKee was also present.
Mike McKee: The Fed meeting takes place in a plain conference room, with antler lights hanging from the ceiling. We sit at a long, flat table and folding chairs. It’s not fancy at all, but at least it’s a beautiful place.
Holder: What was the atmosphere in the room when everyone was waiting for Powell to take the stage?
McKee: You know, people in this industry are used to this kind of thing, so you won’t be waiting for someone to show up at a rock concert. But people are very interested in his speech, very interested, especially when they are expecting some form of interest rate cut announcement.
**Hold:**Cut rates. The Fed has kept the Intrerest Rate high at around 5.5% for the past year. But with the rise in unemployment rate and the decline in inflation rate, the pressure on the Fed to cut rates is increasing. When Powell walked into the room and stepped onto the podium, it sounded like he agreed.
Jerome Powell: Now is the time for policy adjustments. The direction forward is clear, and the timing and pace of interest rate cuts will depend on incoming data, evolving outlook, and risk balance.
Holder: Usually, Powell’s speeches are somewhat vague. There isn’t much direct talk. But not this time.
McKinsey: The interest rate is falling. That’s the bottom line. The Fed has recognized that the battle against inflation is almost won. They are now more confident because they are bringing the inflation rate down to the target of 2%. They are starting to worry about the rise in unemployment. Therefore, their so-called risk balance has shifted. It’s time for an interest rate cut. So everyone is expecting a rate cut at the meeting on September 18th.
**Hold: **Today’s program is the statement made by Jerome Powell, Chairman of the Federal Reserve, at Jackson Hole. Why did the Federal Reserve hint that September is finally the time for interest rate cuts, what might the rate cuts look like, and what do they mean for the U.S. economy, the presidential election, and other aspects? I’m Sarah Hold, and this is The Big Take from Bloomberg News.
Hodl: Bloomberg’s Mike McGlone spoke with us in a mobile studio in the Teton Mountains, surrounded by dismantled equipment. I asked Mike to introduce the background of the Jackson Hole meeting.
Mackie: This is an academic conference aimed at introducing economic theories and papers on implementing monetary policy to policymakers.
Hodl: Its formal name is the Jackson Hole Economic Policy Symposium, hosted by the Kansas City Federal Reserve Bank.
McKee: This situation has been going on for 47 years, but it didn’t become a big deal until Ben Bernanke announced the start of quantitative easing in 2010. Since then, Bernanke, followed by Janet Yellen and now Jay Powell, have taken advantage of this opportunity to make statements that could truly change the direction of the economy.
Hodl: For example, in 2022, Jay Powell came out to tell the financial world that fighting inflation would mean a difficult year ahead.
Powell: Although higher Intrerest Rate, slower rise and weaker labor market conditions will drop inflation, they will also bring some pain to families and businesses.
Holder: People like Mike who report on the Federal Reserve are accustomed to reading between the lines. This is because Federal Reserve Chairman Jay Powell, like others in his position, is very cautious when speaking in public. A single sentence from their mouth can have a huge impact on the global economy. A few years ago, when Powell mentioned ‘some pain’, it was seen as a strong warning signal and the market experienced a big dump as a result. But Mike says that Powell’s tone this year is much brighter.
McKeever: This year is completely different. In the past two years, Powell has made very harsh and severe comments, saying that the Fed will do whatever it takes. They will not give up. No matter what the cost, inflation will disappear. This year, inflation has dropped significantly and is moving towards their target. Therefore, the Fed will never be complacent. They will never say “soft landing”, but they feel much better about the economic situation. I think Powell feels more relaxed when talking to people. He once said, ‘These are my views.’
Powell: This is my assessment of the situation.
Mackie: Your opinion may differ.
Powell: Your opinion may differ.
Mackie: I’m not sure what he meant, but it certainly drew a big laugh from the audience.
Holder: Putting aside the unpredictable dad jokes, Mike said that Jay Powell inserting one or two jokes means that the Federal Reserve must be quite satisfied with the direction of the economy. After two years of a tough situation, high interest rates, and historic levels of inflation, I asked Mike how the Fed determines that now is the time to cut interest rates?
McKi: Of course, they have been closely following the inflation data. Their official measure is the Personal Consumption Expenditures (PCE) price index, which is part of GDP data and can tell them where they think the inflation rate is in relation to the 2% target. But of course, everyone follows the Consumer Price Index. This is the most widely known price index. Many people - ordinary citizens, Americans - also follow it. So they are also very attentive to this, combining the two, they can understand the trend of inflation, and they have been closely following employment data. For a long time, our job creation rate has been very high, which has made them worried, because if you are looking for workers but can’t find them, you have to pay higher wages, which may lead to inflation. Now they say that job positions are declining. Wage pressures are not as great as they used to be. So we can start considering a rate cut, because our measures on both sides have started to decline.
Hodl: Of course, the Federal Reserve does not make decisions in an economic vacuum. There are 70 days left until the US presidential election, and this fact cannot be ignored. Powell often talks about the importance he attaches to the independence of the Federal Reserve.
Powell: The Fed is a very special American institution dedicated to serving all Americans. And it is crucial that we stick to our positions, do what we should do, and not touch on today’s major political issues.
Holder: Central Bank should not be involved in politics. Powell said he takes this responsibility very seriously, so he lives an increasingly private life to avoid the perception that the Fed’s decisions are political. Powell discussed this last month in an interview with Bloomberg host and Carlyle co-founder and co-chair David Rubenstein.
David Rubinstein: Now, when you want to go out, for example, when you eat in a restaurant, do you worry that people are listening to you, are they eavesdropping?
Powell: That’s exactly what I’m worried about. I found out that I’m being recognized now, and the person at the next table is always eavesdropping. So we’re not going to restaurants anymore.
Rubinstein: So what would you do? Would you just go to the private room or not go to the restaurant?
Powell: If you go to a restaurant, you need to be in a private room, by the way, if you have guests at your table, and then start talking loudly, everyone will hear. So you must - we don’t do that now. We often eat at home. We eat at fren’s house.
Hodl: So why would Jay Powell - someone who works so hard to keep the Fed out of the political spotlight - announce a rate cut on the eve of the election? I handed this question over to Mike.
**Hodl: Will politics influence the way the Fed makes these decisions? Do people think the Fed will cut interest rates for political reasons?
McKee: Well, ordinary people participating in campaigns and reading comments might think so. But Federal Reserve officials insist that historical records show that election years do not change their actions. They have raised and lowered interest rates in election years and shortly before election day. There is no evidence that they have ever been biased, and they are very resentful of the idea that they are biased. Their view is that our job is to drop the inflation rate and increase the employment rate. This is what Congress tells us to do. So no matter what the external situation is, we will do this.
Holder: Although the Federal Reserve has no political agenda, its decisions do have political implications. So what does announcing a rate cut mean for the presidential election… and what does it mean for American consumers and the global market? We’ll talk about this after the break.
HODL: Under the elk’s horns, as economists, scholars, and journalists sat on folding chairs at the Jackson Lake Lodge, Jay Powell wrote the Federal Reserve’s Interest Rate plan high above the Teton Range. He said, “It’s time for policy adjustments now.” Mike McKee, who reports on international economics and politics for Bloomberg News, was also present. So I asked him what kind of reaction Powell’s remarks had received?
McKinsey: The reaction in the room is applause, standard applause. I don’t think anyone is surprised because everyone is expecting it to be time, even though they didn’t say they would do it. But what surprised many people is that the stock market started to pump. I heard several Fed officials say, doesn’t the market know this? Because it seems like everyone else knows? So they are happy about it, but some are surprised or a bit unexpected.
Hodl: Mike said, **the market may have partially reacted to the language used by Powell. Powell said his “confidence has strengthened,” which is again very direct, especially for the Fed chairman. After he said this, the stock market soared.
McKinsey: This basically tells them that the Interest Rate will go down and will continue to go down. Of course, the stock market is a forward discounting mechanism. So if you know they have started a cycle and historically, every time they start a rate-cutting cycle, they will cut rates at least three times, then you can start to follow the six-month, nine-month, and twelve-month situation and discount your future returns. This makes it easier for people to make plans. Now, why they may not have had a plan before or they were just waiting for results we don’t know, but if we know what the stock market will do, we will all become rich.
Hodl: Powell’s speech contains enough foreshadowing to stir the market, although we still don’t know the exact size and speed of the future rate-cutting cycle.
**Holder: Do we know how the interest rate cut will affect the U.S. economy? Which industries will be most affected?
**McCarthy: The first thing to look at is housing and cars, because they are very sensitive to Intrerest Rate. You have to take out a loan because it is a large and expensive purchase. Therefore, the Fed follows the housing and automotive industries, both of which have been affected. We don’t know what level of Intrerest Rate is needed to drop mortgage Intrerest Rate enough to attract people to buy homes again. Cars should start performing better, and then we hope that as credit card Intrerest Rate drops, consumer purchases will increase, and we will also follow business investment. It has been strong all along. As part of the ‘Inflation Reduction Act’, we will be making fiscal expenditures to build more infrastructure. So, there should also be some funds flowing in this direction. The impact on the economy will take longer because it takes time to build a large building. But these are all things that need to be followed.
**Holder: What does the US interest rate cut mean for the rest of the world’s economies?
McKee: Hmm, this means a lot, especially for smaller economies. If they do not rely on the US dollar, they will react to the US dollar, because if the US dollar strengthens, their currency will weaken. The currencies of other countries in the world will strengthen. This is just a question of how much they will strengthen. It will take some time to achieve, but we have already seen some adjustments in the forex market, with the euro, yen and pound sterling being the major currencies. This will also begin to penetrate emerging markets.
Holder: Will Powell’s speech also affect the upcoming U.S. election? Mike said that although both candidates may welcome a drop in interest rates while in office, the economic impact on American consumers may be too small to have a major influence on people’s voting behavior. Especially if the interest rate drops by a quarter of a percentage point, as many people expect.
McKee: 25 basis points will not have a significant impact on anyone’s monthly payment, and even if there is an impact, it will not exceed a few cents. From a psychological perspective, it may signal that the situation is improving. If people feel that the economy is improving, they may vote in support. The Fed believes that this will not have a major impact, but it is not important to them, as they will do it anyway.
Hodl: There may still be many changes before November - there are still many data to be released before September 18. The Fed will hold its next meeting on September 18, when they are expected to announce the long-awaited rate cut.
Mackey: We will release a series of economic data, including the latest GDP data and the latest expenditure data, which are important for the Fed. Are Americans still spending money? Then we enter the first week of September, which is always - the first week of each month is always an important week because we will get very important manufacturing and employment data. Of course, we also have the employment report. That’s September 6th. So it’s a day worth following. If all goes well, then the rate cut is imminent.
Hodl: Jay Powell will be very busy in the coming weeks. But before the Fed chairman has to return to Washington, Mai hopes to relax him a little. He invited Powell to attend the famous Jackson Hole Rodeo.
**Mackie: **He won’t go to the rodeo. As far as I know. I invited him. But he will hike rates—
Holder: Did he refuse, or just not respond?
McKee: He refused. I think he didn’t want to stay with a bunch of reporters, but–
Holder: Will you blame him?
McKi: I don’t know why. I don’t know why. Yes. But he’s going on a hiking trip. He and his wife used to do this a lot while they were here, and they may also canoe or do something similar.
Hodl: Therefore, the only Bull Market that Powell can see exists in the market.
