As we discussed last week, the annual economic symposium in Jackson Hole has historically served as a platform for central bankers to communicate important signals regarding policy adjustments.
With that in mind, this past Friday Jerome Powell made a long speech, where he covered the evolution of the economy and monetary policy since his last speech in Jackson Hole, a year ago.
He stepped through the state of the economy, how tariff and immigration policy have affected the Fed's outlook, and then he said this: "the shifting balance of risks may warrant adjusting our policy stance."
What is "shifting?"
The labor market.
So, the Fed has gone from thinking the labor market was "in balance" — not a problem — to admitting only weeks later that it's a recession risk.
And with that, given the Fed is in a restrictive stance (putting downward pressure on the economy), the risks in the labor market "may warrant" removing some of that restriction.
Now, this was far from the explicit signalling Powell gave last year, when he said: "the time has come for policy to adjust."
Nonetheless, markets responded on Friday like it was a pivot.
Yields went down. The dollar went down. Stocks soared, especially the more interest rate sensitive small caps.
As we discussed earlier in the month, given the cracks in the labor market, this environment where fiscal and industrial policy has a foot on the gas pedal, while monetary policy has had a foot on the brake, is about to change.
When uneventful CPI data came in a couple of weeks ago, the market reaction to the inflation report was decisive: The S&P 500 and Nasdaq closed on new record highs. Small caps had a huge day.
When this subtle acknowledgement of overly restrictive policy came from Jerome Powell on Friday, the market reaction was decisive: The dow went to record highs, and the Russell 2000 went up 4%.
Clearly, the market wants the Fed to get out of the way.