Powell says Fed may need to cut rates, will proceed carefully

By Howard Schneider and Ann Saphir

JACKSON HOLE, Wyoming, Aug 22 (Reuters) - Federal Reserve Chair Jerome Powell on Friday signaled a possible interest rate cut at the U.S. central bank's meeting next month, saying that risks to the job market were rising but also noting inflation remained a threat and that a decision wasn't set in stone.

While his comments were not as explicit as those previewing rate cuts following last year's Jackson Hole conference, investors quickly bumped up bets that the Fed will reduce its policy rate by a quarter of a percentage point at its September 16-17 meeting.

Several Wall Street analysts alerted clients they were tearing up prior forecasts for the Fed to wait until December to cut rates and now expected reductions totaling half a percentage point by the end of the year, from the current 4.25%-4.50% range.

"The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance," Powell told international economists and policymakers at the Fed's annual conference in Wyoming. "Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance."

Powell's comments put heavy weight on the next monthly employment report, due September 5, and inflation reports due the following week. The most recent job-market report showed monthly payroll gains had plummeted to a monthly average of 35,000 in the July to May period, though the unemployment rate was a still-low 4.2%.

"While the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly," the Fed chief said, noting that while tariffs are expected to drive prices higher, the baseline case is for their impact on inflation to fade.

"It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed."

U.S. stocks rose after the remarks, and traders assigned about an 85% probability that the Fed would deliver a quarter-percentage-point rate cut next month, up from about 75% earlier in the day. Market bets also strongly favor a second rate cut in December. U.S. Treasury yields dropped and the dollar slid.

"Chair Powell came in more dovish than expected," said Thomas Hayes, chairman of Great Hill Capital LLC. "He has set the table to move in September."

TRUMP PRESSURE CAMPAIGN

Powell's remarks drew new ire from President Donald Trump, who contends there is no risk of inflation and that the Fed should slash rates immediately.

"We call him too late for a reason. He should have cut them a year ago. He's too late," Trump said. The Fed did, in fact, cut rates by a full percentage point in the months following last year's Jackson Hole event.

Trump has been pressuring the Fed with calls for Powell to resign, and broadened that campaign this week with demands that Fed Governor Lisa Cook also leave her position.

As Powell delivered his remarks, Trump said in a post on his Truth Social media platform that he would fire Cook if she does not resign from the central bank. Fed Board members have long been understood to be only subject to removal "for cause," meaning malfeasance.

The Department of Justice, after a referral from the Trump administration, has opened an investigation into alleged misstatements about her mortgages on two properties. Cook, who is attending the Jackson Hole conference, has said she won't be bullied into resigning.

Even as the political maelstrom threatened to overshadow the conference, it was clear a difficult policy debate lay ahead within the Fed itself, as some policymakers signaled they may balk at a near-term rate cut.

The event's host, Kansas City Fed President Jeffrey Schmid, and the also hawkish Cleveland Fed chief Beth Hammack said in TV interviews against the backdrop of the Grand Teton range that they remain wary about cutting while inflation was still above target and not looking on a trajectory to get there soon.

Other policymakers in attendance, including Governor Christopher Waller, argue the impact of the tariffs will be modest and short-lived, and that rate cuts are warranted now to protect a weakening job market. Waller is on a list of possible Powell replacements.

Powell's remarks bent toward Waller's view, also embraced in recent weeks by policymakers such as San Francisco Fed President Mary Daly, who has called for a "recalibration" of interest rates.

Powell received a standing ovation as he began his remarks, a coda to eight years which began and ended with withering criticism from Trump, who nominated the former investment banker to lead the Fed during his first term but quickly soured over Powell's unwillingness to keep monetary policy as loose as the president wanted. The Trump administration is both searching for a replacement and pressuring Powell and other members of the Fed's Board of Governors to resign in hopes of appointing a majority of the seven-member body.

The Fed chief cannot be removed over disputes about interest rate decisions. Powell, who was appointed to a second term in the top Fed job by former President Joe Biden, has said he intends to continue leading the central bank until his term expires next May.

Alongside his update on the economy, Powell released a new Fed strategic framework that emphasized that the central bank's maximum employment mandate hinges on price stability.

The Fed has opted to hold benchmark interest rates steady at every meeting this year, as Powell and other Fed officials said they needed to wait and see how the Trump administration's policies would affect inflation, which remains above the central bank's 2% target.

“He had been saying wait and see. He now seems more in the camp that ‘we have waited and we have seen and we haven’t seen that much,'" said former Fed Governor Randall Krozsner. "It looks now likely that the impact on tariffs will be more of a one off…I do think the labor market is slowing. Policy has been quite restrictive for quite some time.”