Key Takeaways
- Economists say Powell’s speech in Jackson Hole indicated a greater willingness to cut interest rates despite tariff inflation pressures.
- Powell cited the risks of a weakening jobs market and slowing overall growth.
- Futures markets put an 89% chance of a quarter-point cut in September.
Federal Reserve Chair Jerome Powell’s eagerly awaited speech at the central bank’s annual conference in Jackson Hole, Wyoming, on Friday has analysts saying an interest rate cut looks very likely in September. While he noted that tariffs are putting upward pressure on inflation, the balance of risks appears to have shifted toward a weakening economy.
“With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” Powell said. “Inflation had moved much closer to our objective, and the labor market had cooled from its formerly overheated state. Upside risks to inflation had diminished.”
In the wake of Powell’s speech, bond futures traders ramped up the odds of a September cut in the federal-funds rate from its current target of 4.25%-4.50%. According to the CME FedWatch Tool, the odds of an interest rate cut in September are approaching 90%, up from 73% on Thursday.
The Fed is slated to announce its next decision on interest rates on Sept. 17.
Stocks jumped on the news, with the Morningstar US Market Index up 1.7% at Friday’s US close.
In the bond market, the yield on the 10-year Treasury fell to 4.26% on Friday, down from 4.31% when markets had opened. Among shorter maturities, which are more closely tied to Fed policy, the yield on the US Treasury two-year note closed at 3.69% from 3.79% before Powell’s remarks.
The following at excerpts of commentary on Powell’s speech.
Powell Made a Case For Cuts
Dominic J. Pappalardo, chief multi-asset strategist at Morningstar
“Powell opened his speech by listing three factors that support lowering rates:
- Inflation has moved closer to their objective. While inflation is still above the Fed’s 2% target, it has come down substantially over the previous two years.
- ‘The labor market has cooled from its formerly overheated state.’ The most recent employment report showed fewer than expected job additions while also (and more importantly) announcing significant revisions to the previous month’s data.
- ‘Upside risk to inflation had diminished.’ As the labor market softens, economic activity often slows—both factors that reduce the likelihood of substantial increases in inflation.
“By beginning the speech in this manner, it seems clear that Powell was effectively making an argument for rate cuts. This was likely intended to confirm growing expectations that the Fed will cut rates in September. It’s possible his intended audience includes some of the Committee members that have been reticent to lower rates to this point. We know that in the previous Fed meeting at least two members wanted to lower rates at that point in time based on their dissention to hold rates steady. Powell has been adamant that the Fed would remain both patient- and data-dependent—it is clear that the data they value has been deteriorating, limiting their ability to remain patient.
“He also offered the following commentary on slowing GDP growth: ‘GDP growth has slowed notably in the first half of this year to a pace of 1.2%, roughly half the 2.5% pace in 2024. The decline in growth has largely reflected a slowdown in consumer spending. As with the labor market, some of the slowing in GDP likely reflects slower growth of supply or potential output.' This comment also highlighted the weight the Fed is putting on the weakening employment picture and the second order effects of it, confirming that the balance of risks has shifted from inflation towards economic and employment weakness.
“Powell acknowledged that the impact of tariffs on consumer prices has been seen, while stating that ‘The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem.’ It seems Powell is leaning more toward the belief that tariffs may be more of a onetime bump to prices as opposed to causing ongoing inflation, although he highlighted this as one of the potential risks that could prevent rates from moving lower over time.”
Both Supply and Demand Slowing in the Labor Market
Jan Hatzius, cheif economist at Goldman Sachs
“Powell noted that the labor market was in ‘a curious kind of balance that results from a marked slowing in both the supply of and demand for workers’ and that ‘labor supply has softened in line with demand.’ In this context, Powell judged that ‘downside risks to employment are rising’ and that those risks could materialize quickly ‘in the form of sharply higher layoffs and rising unemployment.’ Powell also noted that GDP growth had ‘slowed notably,’ but that some of the slowdown ‘likely reflects slower growth of supply or potential output.’”
Labor Market May Not Remain in Balance
Michael Feroli, chief US economist at JPMorgan
“Powell prefaced his discussion of the outlook by referencing last year’s policy adjustment, which occurred in the wake of an almost 1-percentage-point increase in the unemployment rate, calling it ‘a development that historically has not occurred outside of recessions.’ While the labor market has since remained in balance, it is clear that Powell does not have much confidence in the durability of that balance, but instead worries about the risk of ‘sharply higher layoffs and rising unemployment.’”
Long-Run Fed Rates Remains Uncertain
Jeffrey Roach, chief economist at LPL Financial
“The macro outlook should convince the Fed to cut rates at the Sept. 17 meeting. The hint of upcoming rate cuts will tamp down yields and bolster markets in the near term. But looking out in the horizon, structural shifts in the economy have created uncertainty about the long-run fed funds rate. Suffice it to say, the neutral rate will be higher than during the 2010s.”
Fed Returns to Its Former Framework
Michael Gregory, deputy chief economist at BMO Capital Markets
“The Fed has returned to a framework of flexible inflation targeting (worrying about both overshoots and undershoots and having the flexibility to address them differently). And although the Committee still ‘recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability,’ this is now less likely to prevent preemptive policy tightening.
“Powell’s rate cut signal was stronger than expected, but a move next month is still not guaranteed. There is almost a month’s worth of data and potential Administration policy developments in the interim. For now, though, we lean toward a rate cut.”
Shift in Tone from Meeting Minutes
Oliver Allen, senior US economist at Pantheon Macroeconomics
“The speech represented a marked shift in tone from the Fed’s July minutes earlier this week, which suggested that most FOMC members saw the upside risks to inflation as ‘more salient’ than the downside risks to inflation. Powell acknowledged today that the balance of risks ‘appears to be shifting.’ The obvious catalyst for that shift was July’s remarkably weak employment report, which saw average growth in payrolls in the three months to July slip to just 35K, down from 168K in 2024.
“Powell also indicated that the upward risks to inflation due to tariffs continue to weigh heavily on policymakers’ minds, although he also laid out an argument that we’ve been pushing for a long time, namely that labor market weakness means workers are unlikely to have the bargaining power required to push for higher wages to protect their real incomes in response to a tariff-driven jump in goods inflation.
“We think that continued weakness in hiring will push the unemployment rate past the FOMC’s median year-end forecast of 4.50% within the next few months, ending 2025 at closer to 4.75%. Meanwhile, we expect the tariff-driven bout of inflation to remain mostly restricted to goods. In those circumstances, we expect the Fed to follow up a 25bp easing in September with further 25bp cuts in November and December. That is still a bit more easing than is discounted in markets.”
Fed Base Case: Tariffs Are a Onetime Price Shift
Christopher Hodge, chief economist of the US at Natixis
“Powell signaled that cuts were on the way and September is a live meeting, but the timing of when cuts will come will be (as always) dependent on the data. The speech was viewed as dovish, and rightly so, as Powell confirmed that the ‘shifting balance of risks may warrant adjusting our policy stance,’ but he also acknowledged that both inflation and unemployment are moving in the wrong direction (’a challenging situation’).”
“Powell noted that the effects of tariffs are still playing out, and that ‘a reasonable base case is that the effects will be relatively short-lived—a onetime shift in the price level.’ This has always been the base case for the Fed, but the FOMC needs to leave room for the possibility that tariffs will have broader effects on inflation and indeed we have had a string of increases in service prices.”
