Fed Policy Shift: Rate Cut Cycle Beginning Analysis

1.What Happened

Federal Reserve Chair Jerome Powell signaled in Jackson Hole that "the time has come for policy to adjust" following three consecutive months of cooling inflation (CPI at 2.4%, down from 9.1% peak) and unemployment rising to 4.3% from 3.4% six months ago.

2.Why It Matters

The Fed operates with a dual mandate: price stability and maximum employment. When both inflation falls AND unemployment rises, the Fed historically pivots aggressively. This is not speculation—it is following the Fed's own published framework.

3.Historical Context

Since 1990, every time unemployment rose 0.5% or more while inflation fell below 3%, the Fed initiated rate cuts within 3-6 months. This occurred in 1995 (soft landing), 2001 (recession), 2007 (crisis), and 2019 (preemptive cuts). Average first cut: 50 basis points.

4.Key Indicators

Key data: (1) Core PCE (Fed's preferred inflation measure) at 2.6% vs 2% target, (2) Sahm Rule recession indicator at 0.53 (warning threshold: 0.50), (3) Labor force participation unchanged at 62.7%, (4) Fed Funds futures pricing 85% chance of September cut.

5.Confidence Assessment

92% confidence stems from: Historical precedent (10 of 11 similar scenarios led to cuts), current Fed rhetoric alignment (Powell's speech), market pricing confirmation (Fed Funds futures), and absence of conflicting geopolitical shocks.

6.What to Watch Next

Next critical datapoints: (1) August non-farm payroll report (Sep 6), (2) August CPI (Sep 11), (3) FOMC meeting (Sep 17-18). If unemployment reaches 4.5%, historical precedent suggests emergency inter-meeting cut becomes probable.

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