Powell Plays Best Hand He Can from a Politically Stacked Deck: McGeever

Powell is clearly in an unenviable position. The two sides of the Fed's dual mandate - maximum employment and stable prices - are in tension, with data indicating looming risks on both sides. And this conundrum has been made doubly difficult by the public political pressure

(The opinions expressed here are those of the author, a columnist for Reuters.)

ORLANDO, Florida - Federal Reserve Chair Jerome Powell is coming under fire for appearing to cave to political pressure in his Jackson Hole speech on Friday, which opened the door to an interest rate cut next month, a shift from his more hawkish stance only a few weeks ago. But the charge is unfair.

The heat is based not just on the economic justifications for his apparent about-face, but the politics, namely the accusation that he 'caved' to President Donald Trump's incessant pressure to lower borrowing costs.

Powell was in a no-win situation. He essentially had three potential avenues to go down when delivering the near-term policy outlook, all of which left him open to charges of political motivation.

First, he could have maintained the somewhat-hawkish steer he provided in his July 30 press conference when he signaled that the rate-setting committee was in no rush to adjust policy and that more data was needed to justify a move.

But two days later came the unequivocally weak July unemployment data, including downward revisions to May and June's job figures that were among the largest on record outside of a crisis or recession. This, unsurprisingly, sent the market's expectations for rate cuts soaring.

If Powell had simply held the July 30 line in his Jackson Hole speech despite the new data, he wouldn't have come across as mildly hawkish but unabashedly tight.

Moreover, he would likely have been accused of politically motivated stubbornness, with pundits arguing that he was refusing to budge simply because he wanted to show Trump that he would not buckle under presidential pressure.

That same charge would, of course, have also been leveled if he had taken the second route, signaling that the uncertain inflation dynamics made any thoughts of a rate cut now far too premature.

That takes us to the third option. That's the one Powell took when he indicated that the time to adjust policy was likely approaching because of the worrying signs of weakness in the labor market.

This isn't a commitment to ease policy, but an acknowledgement that it's a strong possibility. It's also a signal that the incoming economic data, specifically the August employment and CPI inflation reports, will largely determine whether the Fed cuts rates on September 17.

None of that suggests political interference is at play.

LABOR OF DOVE

The market seems to agree.

If rates traders believed easing now was a policy error – given that inflation is still above target and could rise further – longer-dated yields should have risen. They didn't. The 10-year yield actually fell nearly 8 basis points.

Ten-year inflation swaps also dropped slightly to 2.43%, roughly where they have been trading, on average, over the past three months.

Tellingly, Powell's speech also failed to dramatically alter the market's monetary policy expectations. U.S. rate futures closed on Friday roughly where they had traded for most of last week, pricing in around an 80% chance of a rate cut in September and a near-100% probability of another one by December.

In short, not much to see here. Not yet, anyway.

To be sure, the economic case against Powell's dovish shift is a strong one. Inflation is currently around 3%, and has been consistently above the Fed's 2% target for more than four years. Inflation expectations are also higher than the Fed would like, even before factoring in any potential pass through from Trump's tariffs.

In addition, financial conditions are looser than they have been in years, with stocks and other assets hitting record highs.

So why consider cutting interest rates? The argument appears to be based on two beliefs: first that tariffs will be a one-time hit to prices and thus should not lead to an inflationary spiral; and second that unemployment has the potential to shoot up quickly, meaning the Fed is wise to get ahead of the curve.

Powell is clearly in an unenviable position. The two sides of the Fed's dual mandate - maximum employment and stable prices - are in tension, with data indicating looming risks on both sides. And this conundrum has been made doubly difficult by the public political pressure.

Powell was caught between Trump and a hard place. He did the best he could.

(The opinions expressed here are those of the author, a columnist for Reuters)

(By Jamie McGeever; Editing by Hugh Lawson)