1. Core points of Powell's recent speech
Powell's latest remarks mainly focus on the trade-offs between economic balance, inflation risks, and the job market, with the following key points:
1. Cautious policy stance
Emphasize the current inflation risk leaning upwards (driven by tariff policies), while the employment risk leans towards weakness (employment growth has significantly slowed, and the unemployment rate has risen to 4.4%), therefore the Federal Reserve needs to find a balance between the dual objectives. He clearly stated: "Monetary policy does not have a risk-free path."
2. Downplay the persistence of inflation
Powell believes that the recent increase in commodity prices is mainly driven by tariff policies, representing a "one-time price shock," rather than persistent inflation. However, he also warned that if the supply chain recovery is delayed (such as in the automotive industry), inflationary pressures may be prolonged.
3. Employment market warning
It is emphasized that the youth unemployment rate is high (the unemployment rate for university students aged 20-24 is 8.5%), coupled with weakening recruitment demand, the labor market has shown a fragile balance of 'low layoffs but low hiring'.
4. Interest rate and balance sheet reduction signals
- Interest rates: Deny preset paths, but acknowledge that 'current rates are still slightly restrictive', leaving room for future rate cuts.
- Balance sheet reduction: Indicates that the reduction may end in the coming months, releasing liquidity improvement expectations. (That is, stopping the withdrawal of liquidity from the market to add momentum to market behavior)
II. Will the Federal Reserve cut rates in December?
High probability of a rate cut (85% market expectation), with the core basis as follows:
1. Sufficient evidence of employment market deterioration
- The unemployment rate has risen to 4.4% (the highest since October 2021), and severe unemployment among the youth directly affects consumption momentum.
- Corporate layoff warnings and a continuous increase in the number of unemployment benefit applications reflect a slowdown in labor demand.
2. Internal shift to dovish at the Federal Reserve
- New York Federal Reserve President Williams, Governor Waller and other core officials have recently clearly supported a rate cut in December.
- Doves believe that the risk of employment deterioration is higher than the risk of inflation rebound.
3. Decision-making pressure during data vacuum period is low
No key economic data will be released before the December meeting, so the resistance to policy adjustments is relatively small.
4. Market consensus is highly consistent
CME futures pricing shows an 85%-86% probability of a 25 basis point rate cut, with institutions like Goldman Sachs and Barclays predicting implementation.
Main variables:
Hawkish officials (such as Schmidt and Moussailem) may oppose rate cuts, advocating caution against inflation recurrence.
3. Outlook for subsequent policy paths (2026)
1. Interest rate path for 2026: Goldman Sachs expects the federal funds rate to drop to 3%-3.25% by mid-year, with potential rate cuts in March and June.
2. Fiscal stimulus impact: The implementation of the 'Great and Beautiful Act' in 2026 may bring fiscal dividends, but it is necessary to balance the pressure of weak employment.
3. Market strategy recommendations: Goldman Sachs recommends shorting 10-year U.S. Treasuries in the first quarter of 2026 to hedge against the bond market pressure brought by fiscal expansion.
Summary
**Short term (December): Although Powell has not directly committed to a rate cut, given the increasing employment risks, internal dovish dominance, and market pricing, a 25 basis point rate cut is almost a certainty.
**Mid to long term: 2026 may continue moderate easing, but fiscal expansion may constrain the downward space for interest rates.
