Powell Now Hints at Rate Cut Amid Rising Economic Risks

In a pivotal address at the Federal Reserve’s annual symposium in Jackson Hole, Wyoming, on August 22, 2025, Federal Reserve Chair Jerome Powell indicated that the central bank’s current monetary policy may be overly restrictive, opening the door to an interest rate cut as early as the September meeting.

Powell described the labor market as being in a “curious kind of balance,” driven by reduced hiring and a shrinking pool of available workers, exacerbated by President Donald Trump’s immigration crackdown and ongoing demographic shifts.

“Downside risks to employment are rising,” Powell emphasized in his speech.

“And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”

This assessment comes as recent data shows payroll job growth slowing dramatically to an average of just 35,000 per month over the past three months, down from 168,000 earlier in 2024, with the unemployment rate holding at a low 4.2% but showing signs of vulnerability.

Powell suggested that adjusting the Fed’s benchmark interest rate downward could be warranted to ease borrowing costs for consumers and businesses, thereby stimulating economic activity.

This potential shift aligns with the Fed’s dual mandate of fostering maximum employment and stable prices, especially as risks to the job market tilt downward while inflation pressures from tariffs emerge.

Addressing the economic fallout from Trump’s tariffs, Powell noted that their impacts on consumer prices “are now clearly visible” and are expected to continue building “over coming months,” though with “high uncertainty about timing and amounts.”

He highlighted that total PCE inflation rose 2.6% over the past 12 months, with core PCE at 2.9%, influenced by a 1.1% increase in goods prices—a reversal from prior declines.

While Powell acknowledged the possibility of tariffs causing a one-time price level shift rather than sustained inflation, he cautioned against risks of broader wage-price spirals, though he deemed this unlikely given the balanced labor market.

“Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem,” he stated firmly.

This discussion reflects internal Fed debates, as revealed in recent meeting minutes, where some officials view tariff-induced inflation as transitory and advocate for rate cuts to support employment, while others urge caution amid persistent core inflation in services.

Market Surges on Rate Cut Expectations

Financial markets reacted swiftly to Powell’s remarks, with stocks rallying as investors priced in a near-certain rate cut at the Fed’s September 17 meeting and another by year-end.

“Today’s speech could not be more clear that Powell is ready to cut rates on September 17th and the market is now fully priced for it and for a 2nd one by year end,” wrote Peter Boockvar, an independent economist and market strategist, in a post-speech note.

Bonds also rallied, signaling broader optimism, though analysts like Kevin Ford of Convera noted the tension: “Core inflation is still stubborn and the labor market, while showing some signs of cooling, isn’t screaming for emergency intervention.”

This mixed data—low layoffs but stalled hiring—underscores the Fed’s delicate balancing act.

Political Pressures Intensify Amid Trump Administration Attacks

Powell’s speech unfolds against a backdrop of unprecedented political interference from the Trump administration during his second term.

Trump has repeatedly urged rate cuts via social media, claiming they would boost the economy and home buying without igniting inflation.

However, experts clarify that the Fed’s benchmark rate does not directly influence mortgage rates, and a significant downturn would be needed to lower 30-year rates materially.

Tensions escalated this week with accusations against Fed Governor Lisa Cook, nominated by former President Joe Biden.

Bill Pulte, head of the Federal Housing Finance Agency, alleged mortgage fraud, posting unverified images suggesting discrepancies in her residency claims.

Trump amplified the calls, demanding Cook’s resignation and threatening to fire her.

Cook responded by committing to address “any legitimate questions” with accurate information.

Adding to Trump’s influence, he recently nominated economic adviser Stephen Miran to replace departing Governor Adriana Kugler, potentially reshaping the Fed’s board.

As Powell noted, the policy rate is now 100 basis points closer to neutral than a year ago, allowing the Fed to “proceed carefully” in assessing data.

With upside risks to inflation and downside risks to employment, the Fed faces a “challenging situation” under its framework, balancing both mandates.

Analysts suggest this speech marks a critical pivot, potentially averting recessionary pressures while navigating tariff disruptions and political headwinds.

As the U.S. economy grapples with global trade remakes, Powell’s final address as chair—amid speculation of changes under Trump—underscores the Fed’s commitment to data-driven decisions over external pressures.

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