A (Potential) Rate Cut on the Way
The centerpiece of the symposium - in the eyes of both the markets and the media - is the session with the Chairman of the Federal Reserve (the “Fed”). This year was Chairman Powell’s eighth and final speech at the conference.
The media coverage has largely focused on a single statement which, supposedly, hints at the possibility of an upcoming rate cut. The precise words used were, “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance”.[1]
Markets reacted strongly to this wording,[2] with the likelihood of a September rate cut increasing from 75% to nearly 90%.[3]
The Rest of the Speech
Powell’s 21-minute speech was a dense, and somewhat opaque, reflection of the current state of disorientation in which the Fed, and most market commentators, find themselves.
Powell noted that the labor market is in a ‘curious’ state of balance. Hiring has slowed, but so too has demand, meaning that the labor market is still stable.
However, he believes that this balance is precarious, and recessionary risks are mounting. Tariffs may keep inflation high, while restrictive immigration may keep employment tight, potentially creating a stagflationary risk for the Fed.
The Fed's new strategic framework, formalized in its latest five-year review, shows a departure from its previous strategy, formed in an era of low-interest rates, slow growth and potential deflations.
The committee is officially moving back towards targeting 2% inflation (as opposed to targeting an average of 2%), and aiming for a balanced labor market. Powell acknowledged that the neutral rate may well have moved higher in the post-pandemic era. The current, relatively high rate of borrowing gives the Fed flexibility to move in either direction.
Finally, he explicitly disavowed the concept of a “preset” course, reiterating the need for data-dependent decision making, a concept with which Fed followers will by now be highly familiar.
The Broader Canvas
One of the most notable observations of the Powell speech was the distinction drawn between cyclical and structural changes. His point was twofold: firstly, it is difficult to know if a trend is cyclical or structural.
Second, and equally importantly, the Fed’s power is largely confined to the cyclical realm. By implication, an era of structural change is one in which the Fed must react to rather than set the trend, or even predict it.
The theme of the conference as a whole was ‘Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy’. The 18 other speakers largely focused on the more important, longer-term structural changes such as demographic, fiscal, and technological developments.[4]
For example, declining fertility rates and the resulting ageing populations have the effect of increasing demand for assets, while adding to the fiscal burden on governments in the form of higher entitlements.
On the other hand, the rapid development of AI has the potential to increase productivity and potentially provide the growth to offset fiscal strain, especially if (as suggested) it leads not to a displacement of labor but a reallocation of jobs.
Conclusion
In our opinion, it is these structural trends, rather than the comparative minutiae such as Fed committee appointments and/or firings, that investors should focus on.
Investing is a long-term game, and focusing on long-term trends provides the surest mainstay against the short-term panics and preoccupations that blow too many off course.
