Monetary Policy - The Federal Reserve lowered the federal funds target rate by 25 basis points to a range of 4.00%-4.25% on September 17, 2025, while maintaining the pace of balance sheet reduction[1] - The Fed's dot plot indicates a total of 75 basis points of rate cuts this year and 25 basis points each in the following two years, which is lower than market expectations of 75 basis points for both years[1] Economic Outlook - GDP growth for the first half of 2025 was 1.5%, down from 2.5% in 2024, indicating a slowdown in economic activity[2] - The unemployment rate is projected to be 4.5% for 2025, with a slight decrease to 4.4% in 2026, reflecting concerns about job market stability[5] Inflation Trends - Inflation risks are decreasing, with the PCE inflation rate expected to be 3.0% for 2025, unchanged from previous forecasts[5] - Commodity inflation has rebounded, while service inflation continues to decline, suggesting mixed inflationary pressures[2] Market Reactions - Following the Fed's announcement, major U.S. stock indices experienced fluctuations, with the S&P 500, Nasdaq, and Dow Jones showing changes of -0.10%, -0.33%, and +0.57% respectively[4] - The 2-year and 10-year Treasury yields rose by 1 basis point to 3.52% and 2 basis points to 4.06%, respectively, indicating market adjustments to the Fed's guidance[4] Investment Strategy - Short-term risk assets may enter a volatile phase, while the medium-term outlook remains bullish on U.S. equities, with potential opportunities for adjustments until the end of next year[4] - The focus will shift to the outcomes of U.S.-China negotiations and the stance of Trump and Congress on the fiscal policy for FY26, which could impact market dynamics[4]

Core Insights - The core message from Powell's speech at Jackson Hole is not unconditional easing but a careful balancing act between a weakening labor market and persistent inflation risks [1][2][3] Group 1: Economic Context - The Federal Reserve's dual mandate is under pressure, with low unemployment rates juxtaposed against a labor market showing signs of strain [2][3] - Powell indicated that the current policy rate is closer to neutral, allowing for cautious actions, but warned that monetary policy is not on a predetermined path [2][3] Group 2: Labor Market Concerns - The labor market is experiencing a "peculiar balance" with both supply and demand slowing significantly, partly due to tightened immigration policies [3][4] - Powell highlighted the rising risks of job losses and increased unemployment rates, suggesting that any rate cuts would be defensive rather than indicative of a strong economy [4] Group 3: Inflation Challenges - Inflation remains a concern, with economists worried that tariffs from the Trump administration could elevate prices in the coming months [5] - Powell seems to lean towards ignoring the impact of tariffs, although he acknowledges the need to monitor inflation expectations closely [5] Group 4: Market Reactions - The market's enthusiastic response to Powell's speech may have been exaggerated, reflecting prior expectations of a more hawkish stance [6] - Powell's remarks did not yield to political pressures for significant rate cuts, indicating a commitment to data-driven decision-making [6]