A foundational shift in economic policy
Kevin Ford
Market got what they wanted: a dovish message. Immediately after, markets repositioned to chase risk, with equities surging and the dollar dropping on the higher likelihood of a 25-basis point rate cut in September. However, the true core message of Federal Reserve Chair Jerome Powell’s Jackson Hole address wasn’t about the immediate outlook for monetary policy, but a foundational re-evaluation of the economy’s long-term equilibrium. While markets celebrated the short-term implications of a gradual approach, the central theme was Powell’s acknowledgment that the neutral interest rate may now be structurally higher than in the preceding decade. This insight, which came as the Fed unveiled the outcome of its once-in-five-years review of its monetary policy framework, shifts the baseline for all future policy decisions. This updated strategy might present a potential disconnect between the market’s current euphoria and the long-term reality of a higher interest rate environment.
Powell explicitly stated that “we cannot say for certain where rates will settle out over the longer run, but their neutral level may now be higher than during the 2010s.” This is a significant intellectual shift for the Fed. For years, policymakers operated under the assumption that an array of slow-moving global factors would keep the neutral rate, or the interest rate that is neither stimulative nor restrictive, at a very low level. By attributing a potentially higher rate to shifts in “productivity, demographics, fiscal policy, and other factors,” Powell is signaling that the economic landscape has fundamentally changed. This message supersedes any near-term policy decision because it redefines the entire framework within which the Fed will operate for years to come.
In this context, a 25 basis point move at the next Federal Open Market Committee meeting would appear to be more of a symbolic gesture than a powerful economic lever. If the neutral rate has indeed shifted higher, such a small adjustment does little to change the overall stance of policy, which Powell already described as “modestly” restrictive. Instead, the small move serves as a signaling tool to appease markets and the current administration. It allows the Fed to project a careful, data-dependent approach, avoiding sharp actions that could be misinterpreted, while still maintaining flexibility to respond to incoming data. A finesse move, some might say, aimed at managing expectations without committing to a rapid change in direction.
The markets’ immediate reaction perfectly illustrates this focus on short-term messaging, framing the Fed’s message as dovish. Market participants were hoping to return to risk-on mode, and they interpreted Powell’s measured tone and gradual approach as a green light.
Ultimately, the true genius of Powell’s speech lies in its duality. The acknowledgment of a higher neutral rate fundamentally alters the post-GFC paradigm of low interest rates. While the market may be basking in the short-lived benefits of a perceived dovish stance, the speech’s lasting implication is that the days of “low for long” may be over. His Jackson Hole speech is also a pivotal moment in the context of his own legacy and his upcoming departure, as his term as chair concludes in May 2026. In this address, Powell is trying to leave behind a legacy of intellectual reassessment and evolution for the Federal Reserve, setting the stage for his successor. The current administration, however, has made it clear that they would prefer a more dovish monetary policy, and it’s likely that a new chair would be inclined to move policy closer to a lower neutral rate. This tension will be something to look out for in 2026: while Powell is laying the groundwork for a more realistic, higher-rate environment, his successor may feel a different kind of political pressure to reverse course. This dynamic underscores the duality of Powell’s speech: a message of long-term economic realism that must contend with the short-term political realities of a new leadership change.
Euro regains the 1.37
Kevin Ford
With its latest surge, the Euro has now seen eight separate instances of a +1% or greater move against the US Dollar in 2025. The strong move came after Federal Reserve Chair Jerome Powell’s dovish remarks on Friday, with the EUR/USD pair quickly reclaiming the 1.17 level. In five of the previous seven instances, the Euro was trading higher one week after the initial move.
This pattern suggests that further progress toward the 1.20 level for the Euro is heavily dependent on sustained weakness in the US Dollar. Upcoming economic data, starting from US PCE this Friday, and the August payrolls and CPI reports in a few weeks, will likely introduce volatility ahead of the September FOMC meeting. If the narrative of a challenged “soft-landing” scenario gains traction, and markets assume more rate cuts will occur after September, a focus on medium-term risks to growth could outweigh inflation concerns and pave the way for the Euro to reach the 1.20 milestone. That said, with plenty of data and time remaining before September 17, markets should expect a choppy ride as macro factors continue to lead the way.
Elbows down
Kevin Ford
In Canada, perhaps more important than the Fed opening the door for a rate cut in September is the recent decision to remove certain retaliatory tariffs on US products that comply with the US-Mexico-Canada Agreement (USMCA). While the government will maintain 25% import taxes on US steel and aluminum, as well as tariffs on US automobiles, the move is a major policy shift. Canada, which had been one of the few countries to swiftly retaliate against US new tariff regime, now seems to be aligning with Mexico’s approach. Mexico, despite being a close neighbor and trade partner, has consistently opted for a diplomatic resolution to regional trade disputes rather than engaging in tit-for-tat retaliation. This strategic choice by Mexico, in both the Trump 45′ and Trump 47′ administrations, provides a compelling case study on the efficacy of non-retaliation.
From an economics perspective, a growing body of research suggests that retaliatory tariffs often harm the country imposing them more than the one they’re meant to punish. Retaliatory tariffs increase the cost of imported goods, passing those costs onto domestic consumers and businesses. This can fuel inflation and create supply chain disruptions. Furthermore, it often harms industries that rely on imported parts or materials, making their final products more expensive and less competitive. In Canada’s case, this can be seen in the goods inflation data over the last few months. By not escalating the trade dispute, Canada can better mitigate these domestic economic costs and prepare the ground for future trade negotiations, such as the upcoming USMCA review.
Recent data from 2025 provides a stark comparison between Mexico’s non-retaliation strategy and Canada’s retaliatory one. While both nations have been subject to new US tariffs, especially the sectoral ones, Mexico’s trade performance has proven to be more resilient. According to data from the Bureau of Transportation Statistics, Mexico’s total freight value with the US has grown more robustly than Canada’s over the last few months of 2025. In March 2025, for example, cross-border freight with Mexico reached a record high, with the key Laredo port seeing a 12.4% year-over-year increase. In contrast, Canada’s exports to the US have declined for four consecutive months as of June 2025, according to Statistics Canada. Canada’s share of exports to the US also dropped to one of its lowest proportions on record in May. This suggests that while Canada’s retaliatory tariffs may have been intended to signal strength, they have instead contributed to a measurable slowdown in its critical trade relationship with the US, a fate Mexico has largely avoided by focusing on diplomatic engagement.
On another positive note, retail sales ex autos for the month of June in Canada jumped 1.9%, above the 0.8% expected, showing retail resilience despite of economic uncertainty.
With an eventful Friday, all this compounded, as sentiment shifted dramatically, it has sent the CAD closer to 1.38.
This week, month-end will bring the final print of the Q2 GDP which is expected to show a slight contraction in domestic production. Additionally, the US PCE (Personal Consumption Expenditures) report, also released on Friday, will be a highly relevant indicator to watch.
Broad based US dollar weakness
Table: Currency trends, trading ranges and technical indicators
Key global risk events
Calendar: 25 – 31 August
All times are in ET
Have a question? [email protected]
*The FX rates published are provided by Convera’s Market Insights team for research purposes only. The rates have a unique source and may not align to any live exchange rates quoted on other sites. They are not an indication of actual buy/sell rates, or a financial offer.
