Powell Signals Rate Cut in September at Jackson Hole

The President of the U.S. Federal Reserve (Fed), Jerome Powell, has opened the door to a potential reduction in interest rates in September, indicating rising risks for the labor market as concerns about inflation continue to escalate.

– “The stability of the unemployment rate and other elements of the labor market allows us to proceed cautiously as we consider changes to our policy stance,” Powell stated at Jackson Hole, which has increased expectations that the Fed will lower interest rates at its mid-September meeting.

In fact, Powell primarily relied on the latest labor market report, which was very mild, thus providing many analysts with a clear signal for a rate cut, especially at a time when Fed officials are divided on how and when to adjust policy in the upcoming period. Some pointed to the resilience of the labor market, while others warned that initial signs of weakness in employment could metastasize into a more significant decline.

Powell also mentioned that the labor market is in an ‘unusual balance’ resulting from a significant slowdown in both the supply and demand for workers, and he cited July employment data showing that job growth in recent months has been significantly weaker than previously announced.

– “This unusual situation suggests that risks to employment are rising. If these risks materialize, there could be larger layoffs and rising unemployment,” Powell stated. However, the Fed leader continues to assert that policymakers must be mindful of the possibility that tariffs imposed by U.S. President Donald Trump could lead to persistent inflation. He noted that the effects of tariffs on consumer prices are ‘now clearly visible,’ but it is reasonable to expect that the effects will be relatively short-lived.

– “However, it is also possible that the pressure on price growth due to tariffs could spur a more lasting inflation dynamic, and that is a risk that needs to be assessed and managed,” Powell added, continuing to emphasize the need to balance policy.

Following this speech, which was met with applause from Powell’s audience, yields on government bonds fell, the S&P 500 continued to rise, and the dollar weakened.

In fact, Powell delivered this speech amid unprecedented pressure from the U.S. President and his allies to lower interest rates, which has jeopardized the Fed’s independence in formulating monetary policy.

Regardless, while in June the majority of Fed officials estimated that they would cut interest rates twice this year, a significant minority predicted only one or no cuts. Since then, the labor market has weakened, but progress in cooling inflation has also stalled.

Several policymakers have highlighted signs of weakness in the labor market, and some have explicitly argued that the Fed should begin cutting interest rates again. Governors Christopher Waller and Michelle Bowman opposed the Fed’s decision in July to keep interest rates unchanged, citing the state of the labor market as the main reason for their opposition.

And after a surprisingly weak employment report for July was released a few days later, Fed President for San Francisco Mary Daly and Fed Chief for Minneapolis Neel Kashkari signaled that a cut is expected in September.