Weakening Employment Signals Prompt Shift to Dovish Stance by Officials
As signs of a weakening labor market emerge, dovish sentiments are spreading within the Federal Reserve. Vice Chair Bowman and Governor Waller were the first to express support for a 25-basis-point rate cut. Subsequently, San Francisco Fed President Daly publicly stated that the U.S. job market is softening and there's no evidence that tariffs are impacting core inflation, indicating a need for more flexible monetary policy.
Such statements have swiftly fueled market expectations of a rate cut in September, with the CME's FedWatch tool indicating a nearly 100% probability of a cut. Despite fluctuating inflation indicators, the turning point in the employment market has become a key trigger for changing policy thinking.
“Dual Mandate” Complicates Policy-Making
As a central bank with the dual mandate of "price stability" and "maximum employment," the Federal Reserve faces a rare moment of choice: while inflation remains above target, the job market shows signs of weakness. Maintaining the status quo might amplify economic slowdown risks, while hasty easing could provoke an inflation rebound.
Currently, divisions within the FOMC have become public, with some members believing it may be too late to wait for inflation to drop. Experts note that, amid data lags, the Fed faces a dilemma between acting too slowly and misjudging, making the timing of policy adjustments a crucial test of policy artistry.
Complex Market Sentiments, Hidden Concerns Behind U.S. Stock Market Enthusiasm
The softer stance of the Federal Reserve once temporarily boosted U.S. stocks, with the three major indices rising more than 1%. However, industry insiders caution that the stock market's sensitivity to interest rate changes means that if rate cuts lead to valuation bubbles or misjudgments, the market could face deeper adjustment risks.
July data shows that buying by insiders in U.S. stocks hit a multi-year low, sharply contrasting with individual investors' enthusiasm. Several strategists worry that overly loose monetary policy might lead investors to overlook real economic risks, increasing market volatility potential.
Rate Cut Path Faces Dual Test from Economic Data and Geopolitical Risks
Future policy adjustments will remain highly dependent on the upcoming inflation and employment data. If core CPI and PCE remain moderate in July and August, and non-farm payrolls continue to weaken, a September rate cut is almost certain; conversely, a surprise rebound in inflation or employment could disrupt current market expectations.
More critically, this is a sensitive period for tariff policy adjustments, and the Fed needs to observe the lagged impact of new tariff measures on price structures. If inflation rises again in the fall, the Fed may be forced to delay easing, maintaining higher rates for an extended period.
Proceeding with Caution, Expectation Management Becomes the Fed’s New Tool
Facing the dual challenges of "stagnation" and "inflation," the Federal Reserve must avoid acting hastily while also preventing policy inertia. Between inflation and employment goals, the most feasible current strategy is to guide market expectations through intensive communication while maintaining policy flexibility.
In the coming months, each release of U.S. macroeconomic data could have global financial market repercussions. Every statement from the Fed will serve as a critical benchmark for the market to assess economic health and policy direction. Amid this complex situation, maintaining policy credibility and coordination of the adjustment pace will be the core challenge truly facing the Federal Reserve.