Powell suggests a change to Fed policy

Normally one would like to think of August as being a quieter month, people are away on holiday, the email traffic slows, it’s a good time to catch up on some reading. But this summer there hasn’t been much time to rest. Last week was no exception. Incoming data pointed to more resilient global growth,¹ and gave some Fed members reason to strike a more hawkish tone in their comments during the week. But Fed Chair Jerome Powell, speaking at the Jackson Hole Economic Symposium, was the highlight of the week. He indicated a rate cut could be coming in September as “the shifting balance of risks may warrant adjusting (the) policy stance.” And of course, no week in 2025 is complete without a new attack on the Fed from the US administration.

US technology stocks sold off early in the week² as academics questioned whether artificial intelligence (AI) is doing anything to boost productivity³ and as China directed companies not to use NVIDIA’s H20 chip. However, they rallied on Friday⁴ following Powell’s comments from Jackson Hole.

Potential change in the Fed’s policy stance

Powell’s signal that a rate cut in September is increasingly likely marked a potential shift in the Fed’s policy stance. After a period of relatively restrictive monetary policy, it now sees the balance of risks, particularly signs of a softening labor market, as warranting a more accommodative approach.

While inflation remains a concern, some policymakers appear willing to look past recent tariff-driven price pressures, viewing them as transitory rather than indicative of a broader inflationary trend. This perspective is echoed in the bond market, where inflation breakeven across the 1-, 3-, and 5-year horizons have remained well-anchored.⁵ In effect, the Fed is aligning with market expectations for easing, a development we view as constructive for risk assets. In this environment, we would be reluctant to fight the Fed.

But the US administration is continuing to fight the Fed. This time it called on Fed Governor Lisa Cook to resign, and Powell to fire her — which he doesn’t have the power to do — over an allegation of mortgage fraud. Cook struck back saying she’ll not be pressured into resigning from her position. This is another clear signal that the US administration is seeking to reshape the Fed and push policy rates lower.

Ironically, the minutes from the July Federal Open Market Committee (FOMC) meeting, released last week, were relatively hawkish and suggested most members thought inflation was a bigger problem than growth. Those minutes of course reflected data before the recent labor market data were revised lower.⁶ And on a Bloomberg podcast⁷ last week, Kansas City Fed President Jeffery Schmid stated, “I don’t think we should not talk about would there be a scenario where rates could go higher on the policy side.”

Nonetheless, Powell’s tone at Jackson Hole marked a departure from the more hawkish messaging in the FOMC minutes. We take his comments seriously, as they suggest a shift in the Fed’s thinking. While internal debate and even dissent may emerge in upcoming meetings, the direction of travel appears clear. In our view, his next move is likely toward easier policy.

Signs of global strength emerge in recent data

Purchasing Managers’ Index (PMI) data last week pointed to a resilient growth backdrop where activity is expected to improve over the coming months.⁸ The improvement was broad-based across the US, Europe, and parts of Asia, and showed better employment and pricing expectations among the businesses surveyed. This is typically good news for growth, and potentially stocks, but calls into question when and by how much the Fed will cut its policy rate.

Tech weakness reverses after Powell’s remarks

While the global macro data was positive, the tech sector dragged stocks lower ahead of the Fed meeting at Jackson Hole.⁹ There was no specific piece of news that catalyzed the start of that move. One would have assumed most would be looking forward to NVIDIA’s earnings results next week. It seemed to be the culmination of several pieces of news. First, a recent article¹⁰ was widely cited across newswires suggesting that the productivity gains from AI are not being seen by many firms. It called into question whether these firms will be able to monetize their capex spending.

The geopolitical challenges around leading-edge tech then returned as NVIDIA ordered the suspension of H20 chip production after Chinese authorities moved to restrict the sales of these China-specific processors.

But these concerns were swiftly relegated at the end of the week as the expectation of lower policy rates helped growth areas of the market rally strongly.¹¹

So where does this leave us?

In the week ahead, NVIDIA will report earnings. This is now as much a macro as a micro story. In fact, it may be seen as a geopolitical story, too. Given the capex numbers and projections from the hyperscalers, one could assume the reported numbers will be strong. Comments from NVIDIA President and CEO Jensen Huang should be watched closely however for any sign that his customers will spend less.

The US dollar gained some support early last week from the more hawkish tone surrounding monetary policy,¹² but Powell‘s dovish remarks at the end of the week put the dollar on the back foot. We remain of the view that the trend in the dollar is lower. We believe it remains overvalued¹³ and US interest rate differentials appear poised to diverge with the rest of the world. The attacks on the Fed lend support to further dollar weakness, in our view.

Dollar weakness, improving global growth, and supportive US policy may, in our view, unlock opportunities in areas of the market that have lagged recently, including non-US and smaller-cap US stocks.