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Chair Powell's speech at Jackson Hole signals an imminent easing of monetary policy in the coming months.
Notably, Powell mentioned, "we do not seek or welcome further cooling in the labor market." We believe that such a cooling is already on the horizon due to persistently high real interest rates and tight credit conditions, especially affecting small businesses and subprime borrowers.
A further decline in the labor market poses a significant risk to economic growth and is likely to suppress inflation. The factors that drove inflation after the economy reopened—such as stimulus-fueled increases in retailer and wholesaler margins, supply chain disruptions, higher commodity prices, and surging demand—have largely dissipated. As a result, the inflation outlook is now much more favorable, and the Federal Reserve needs to adjust its policy accordingly.
Powell’s statements, including "the time has come for policy to adjust" and "the direction of travel is clear," strongly suggest that further rate cuts are expected following the first easing in September. Some FOMC members were already inclined to ease in July, and a "vast majority" support easing in September. The main question is whether the Fed will proceed cautiously with a 25 basis point cut or take a bolder approach with a 50 basis point reduction. A 25bp cut is more likely, especially given the expected weak payrolls data this month, which could support Bitcoin prices. However, a 50bp cut would be an upside surprise as markets currently anticipate only a 25bp move.
Although the start of the month saw weak fund flows, the perception of Powell’s dovish stance has shifted the trend, leading to $448 million in inflows, particularly into Bitcoin. Meanwhile, there have been minor outflows from Ethereum, driven by continued (albeit slowing) outflows from the Grayscale Ethereum Trust. iShares has now surpassed Grayscale as the largest asset manager in this space, with $23 billion in assets under management compared to Grayscale’s $20.7 billion.
