In-depth Analysis of the 2025 Jackson Hole Meeting(part 2): The Fed's Real Intentions Hidden Behind the Cheers

[Economic Analysis] Market Reaction After the Jackson Hole Meeting

The 2025 Jackson Hole Meeting was not just a simple economic event. It was because of the keynote speech by Federal Reserve (Fed) Chairman Jerome Powell, who was the focus of the global financial market's expectations. Investors were on high alert for any short-term interest rate cut signals in the speech, and immediately after the speech, the US stock market rose sharply, cheering in unison. However, unlike the market's optimistic reaction, experts focused on the Fed's 'hawkish (pro-tightening)' nature and expressed caution.

Market Reaction After the Jackson Hole Meeting: The Fed's Real Intentions Hidden Behind the Cheers

In this article, we will analyze in detail the immediate reaction of the financial market after the Jackson Hole meeting, and deeply explore the subtle gap between the market's cheers and the experts' caution. Furthermore, we will examine the long-term implications of these Fed policy changes for the future of the global economy and investors' strategies.

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1. Analysis of the Financial Market's Diverse Reactions Based on the Meeting's Outcome

1.1. Immediate Market Reaction

Immediately after Chairman Powell's speech, the US and other global financial markets cheered in unison. With expectations of an interest rate cut within the year spreading, prices of stocks, bonds, and cryptocurrencies all surged.

• Global Stock Market: The US Dow Jones rose 1.89%, the S&P 500 by 1.52%, and the Nasdaq by 1.88%, reaching a new high. Growth stocks and tech stocks, which are particularly sensitive to interest rates, showed strength, and this upward trend had a positive effect on both domestic and foreign stock prices.
• Bond Market: As the interpretation that the speech was 'dovish' became dominant, US Treasury yields showed a decline. This signifies an increase in bond prices, and especially Powell's judgment that he would not respond with excessive tightening to temporary price factors such as tariffs acted as a boon for the bond market.
• Foreign Exchange Market: As the value of the dollar weakened, the won/dollar exchange rate dropped to the 1,380 won level, taking a breather. This became an opportunity for foreign investors, who had been continuing net selling due to concerns about foreign exchange losses from the weak won, to stop selling and return to the domestic stock market.
• Cryptocurrency Market: Driven by expectations of an interest rate cut, major coin prices, including Bitcoin, also surged along with stocks and bonds.

1.2. Discrepancy Between Market Reaction and Expert Evaluation

Despite the immediate cheers from the market, caution was raised in the securities industry that the Fed's policy stance is still 'hawkish (pro-tightening)'. This conflicting interpretation stems from a difference in perspective on the core of Powell's speech.

The market immediately recognized Chairman Powell's mention of "the possibility of a policy stance adjustment" as a 'direct signal' for an interest rate cut. This is a typical pattern of the market, which is sensitive to short-term liquidity increases. However, experts' analysis was different. They evaluated that Powell's speech focused on the Fed's 'long-term policy framework reorganization' to respond to the new economic structure since the pandemic, rather than on the short-term possibility of an interest rate cut.

The abolition of the Average Inflation Targeting (FAIT) and the modification of the employment judgment principle are interpreted as laying the groundwork for the Fed to more flexibly shift between 'hawkish' and 'dovish' stances depending on future economic conditions. By abolishing FAIT, the Fed left the door open for preemptive tightening for price stability, and by removing the phrase 'shortfalls' from the employment criteria, it secured discretion to respond even when employment overheats. This change suggests that the Fed's intention was not just a simple interest rate cut, but to 'secure policy flexibility' in preparation for unpredictable stagflationary pressures.

Therefore, while the market's cheers are based on short-term expectations, there is a subtle discrepancy with the Fed's actual intentions, and there is also the possibility of disappointed selling emerging in the market if future economic indicators turn out differently than expected.

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2. Long-Term Implications and Strategic Suggestions

2.1. Future Monetary Policy Path

It is the prevailing view that the possibility of a September interest rate cut has increased through the 2025 Jackson Hole meeting. However, Chairman Powell emphasized that he would maintain a cautious 'data-driven' approach without specifying a pre-determined path. This suggests that future policy decisions will be determined by key economic indicators such as the August employment report. While many investment banks consider a September rate cut a certainty, they have differing opinions on the number of additional cuts within the year, which shows that uncertainty still exists regarding the Fed's policy path.

2.2. The Fed's Change in Stance on a Stagflationary Environment

This Jackson Hole speech reflects the Fed's recognition that it has ended the era of low interest rates and low inflation of the past decade and is facing new structural challenges. Supply-side shocks such as the Trump administration's tariff policy and the slowdown in labor supply due to reduced immigration are creating 'stagflationary pressures' that simultaneously threaten inflation and employment goals. Powell's suggestion that he would not respond with excessive tightening to supply-side price shocks like tariffs, which he judged as 'temporary' and a 'change in level', established a new principle to meticulously analyze the cause of inflation and flexibly respond to shocks without persistence, unlike in the past. This shows that the era when the Fed could manage the economy with only a simple aggregate demand suppression policy is over. The Fed has laid the groundwork to precisely adjust the intensity and timing of its policies in accordance with changes in economic conditions through a new framework.

2.3. Strategic Investment Implications

The change in the Fed's policy framework means that investors should seek a new investment paradigm from a long-term perspective, rather than just being excited or disappointed by short-term expectations of an interest rate cut. Investors now need to develop the ability to analyze and predict key economic indicators (employment, causes of inflation, etc.) that have become the basis for the Fed's policy decisions, rather than relying on a single 'hawkish' or 'dovish' stance from the Fed. This means that a 'data-driven' approach to investment has become more important than ever.

• Stock Market: If the interest rate cut signal becomes clear, interest in growth stocks and tech stocks may increase. In particular, it is important to closely monitor the trends of domestic sectors that are highly related to US tech stocks, such as semiconductors and IT. In addition, the modification of the employment goal judgment principle suggests that the Fed can quickly revert to an easing policy if employment cools down sharply, which could be a backdrop for stocks and bonds to rise together.
• Bond Market: The judgment that the Fed will not respond with excessive tightening to temporary price factors acts as a boon to the bond market. When interest rate cuts begin, bond yields may fall and prices may rise, so interest in long-term bonds may increase.
• Foreign Exchange Market: In a situation where the dollar is expected to weaken, managing exchange rate volatility will be an important task. It could be positive for export companies, but it could put a burden on the domestic economy, such as rising import prices.

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3. Conclusion: Long-Term Implications and Strategic Suggestions

The 2025 Jackson Hole meeting was a new beginning for the Fed that went beyond a simple 'interest rate cut signal.' Chairman Jerome Powell diagnosed an 'unusual equilibrium' where the short-term risk of inflation and the downside risk of the labor market coexist, and he expressed his intention to fundamentally reorganize the monetary policy framework to suit the new economic environment. This is interpreted as an intention to secure greater flexibility and discretion in future policy decisions by abolishing Average Inflation Targeting (FAIT) and modifying the employment goal principle.

The differing reactions of the market and experts show the multi-layered meaning of this speech. The market cheered in anticipation of short-term liquidity, but experts took a cautious stance, focusing on the long-term implications of these structural changes. While the prevailing view is that the possibility of a September rate cut has increased as a result of this meeting, the Fed is likely to maintain a cautious 'data-driven' policy adjustment stance going forward. Therefore, the market will react more sensitively than ever to future employment and inflation data. The 2025 Jackson Hole meeting will be recorded as a historic turning point where the Fed began its response to the new macroeconomic environment.

Key Summary:
In his Jackson Hole speech, Chairman Powell expressed his intention to reorganize the Fed's monetary policy framework to suit the new economic environment since the pandemic. This is evaluated as an important transition to secure policy flexibility for inflation and employment goals, beyond a simple interest rate cut.

The contents of this blog are for reference for investment decisions only, and investment decisions should be made under an individual's judgment and responsibility. In no case can the information on this blog be used as evidence for legal responsibility for investment results.

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