Fed dovish? Maybe, maybe not

Stephen Dover, CFA, Chief Market Strategist, Head of Franklin Templeton Institute

Larry Hatheway, Global Investment Strategist, Franklin Templeton Institute

Federal Reserve Chairman Jerome Powell's speech today at the Jackson Hole Conference has been greeted by stock, bond and currency markets as a dovish pivot by the typically cautionary head of the US central bank. Stock and bond prices jumped, and the dollar edged lower, as futures markets bid up the odds of rate cuts over the remainder of 2025.

While we don't advocate fighting either the market or the Fed, we can't share fully the markets' embrace of Powell and his colleagues as birds rapidly morphing from hawks to doves. If you read Powell's speech closely, it surely reflects the majority view of the Federal Open Market Committee (the Fed's rate-setting forum), but it's nuanced. It's replete with caveats and even sprinkled with a few hawkish remarks. Indeed, if there is a takeaway, it is that the Fed is manifestly data-dependent and not embarking on a predetermined glide-path to lower rates.

Notably, Powell emphasized a point that ought to give investors pause—namely that inflation risks are “tilted to the upside” while risks to employment are (tilted) “to the downside.” To use Powell's own language, that poses a “challenging situation,” to which we would add, not just for the Fed in setting rates, but for markets sorting out the prospects for growth, profits and the rate at which they are to be discounted.

The road ahead seems rather bumpy.

Moreover, Powell also observed that the experiment the Fed had conducted since 2020 to permit a temporary overshooting of inflation had not worked as intended, hinting that the Fed was likely to return to a firm 2% inflation target. While the impact of tariffs on inflation may prove temporary (funny, transitory is “so yesterday”), a 2% target as ceiling and floor potentially would slow any forthcoming Fed easing until either tariff price increases subside or the Fed is convinced they will not unleash second-round impacts on prices and wages. Either could take time.

In sum, the markets' near-term reaction has been positive, with equity and bond bulls pouncing on a perceived pivot by the FOMC toward a dovish bias. But in our view, Powell's language suggests that not much has changed at the Fed. The road ahead for the Fed and hence for the markets remains murky, with direction to be provided by the incoming data. And those data, whether about growth, inflation, or unemployment, are not likely to be quite as friendly nor as certain as the consensus now appears to believe. 

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