Powell Opens Door to September Rate Cut

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This article was authored by: Myles Udland & Jennifer Schonberger

Federal Reserve Chair Jerome Powell opened the door to a September rate cut, saying in a speech in Jackson Hole that “the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.” In a speech that touched both on the economic outlook and the Fed’s new policy framework, Powell took pains to note that risks from inflation remain “tilted to the upside,” saying that tariff-related inflation pressures “are now clearly visible … with high uncertainty about timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem.” Powell added on inflation that the Fed “will not allow a one-time increase in the price level to become an ongoing inflation problem.” The Fed kept interest rates unchanged in a range of 4.25%-4.50% at the conclusion of its most recent policy meeting on July 31. US stocks soared in the wake of Powell’s comments, as data from the CME Group showed the odds of a September rate cut rising to north of 90% in immediate reaction to the speech. Treasury yields also moved lower in response. Public statements from Fed officials suggest there remain mixed views on whether recent economic data warrants lower interest rates. On the labor market, Powell noted that “downside risks to employment are rising … and if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.” The July jobs report showed the US economy added 73,000 jobs last month, while revisions to job gains in May and June removed some 250,000 job additions from those initial reports. Over the last three months, job gains have averaged just 35,000. The Fed chair also spent a chunk of his speech discussing the Fed’s new policy framework, which is reviewed every five years, and will now see the central bank more closely target 2% inflation rather than inflation that averages 2% over time. The Fed’s new language says the Fed “reaffirms its judgment that inflation at the rate of 2%, as measured by the annual change in the price index, … is most consistent over the longer run with the Federal Reserve’s statutory maximum employment and price stability mandates.”