Markets respond as Powell considers changing stance

Federal Reserve Chair Jerome Powell said Friday that the central bank might lower interest rates as soon as September, citing rising economic risks and ongoing uncertainty.

Speaking at the Fed’s yearly gathering in Jackson Hole, Wyoming, Powell delivered a cautious but clear signal that the Federal Open Market Committee (FOMC) is considering easing monetary policy when it meets next month.

“The balance of risks appears to be shifting,” he said. While he noted that the labor market still looks solid and the economy has shown strength, he also warned that threats to that outlook are increasing. One of those threats is inflation rising again due to tariffs, something he said could put the U.S. in a situation where growth slows while prices climb.

Markets respond as Powell considers changing stance

Right now, interest rates are one full point lower than they were when Powell gave his last Jackson Hole speech in 2024. The current target range is 4.25% to 4.5%, where it’s been stuck since December. Despite that, unemployment remains low, giving the Fed room to wait. But on Friday, Powell said things are getting harder to predict, and the central bank is weighing whether its current policy is too tight.

“Conditions allow us to proceed carefully,” he said. “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”

That line, “may warrant adjusting,” was enough for Wall Street to believe a cut is coming. The yield on the 2-year Treasury note, often tied to interest rate expectations, dropped 0.08 percentage points to 3.71% after the speech was published.

The talk of rate cuts comes while President Donald Trump continues to publicly pressure the Fed to slash rates faster. He has repeatedly criticized Powell and the rest of the FOMC, calling for aggressive action to support the economy. On Friday, Powell did not directly answer Trump’s demands, but he defended the Fed’s independence.

“FOMC members will make these decisions based solely on their assessment of the data and its implications for the economic outlook and the balance of risks. We will never deviate from that approach,” he said.

Powell reviews inflation policy and reflects on past mistakes

Powell also pointed to ongoing uncertainty around tariffs and global trade talks. He said consumer prices are slowly increasing, but wholesale costs are rising more quickly. The White House believes tariff-driven inflation will not last and supports rate cuts. Powell didn’t rule that out but made it clear that outcomes could vary.

“The tariff impacts will be short-lived, a one-time shift in the price level,” he said, calling that a “reasonable base case.” But he added that this is not guaranteed. “It will continue to take time for tariff increases to work their way through supply chains and distribution networks,” he said. “Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.”

In addition to commenting on current risks, Powell also talked about the Fed’s five-year review of its strategy. That review included changes to how the Fed handles inflation. In 2020, during the Covid crisis, the Fed had switched to a strategy that allowed inflation to go above its 2% target temporarily.

The idea was to help the job market recover more fully before tightening again. But soon after, inflation shot up, reaching four-decade highs. At the time, the Fed downplayed it, calling the spike “transitory.” That turned out to be a mistake.

“There was nothing intentional or moderate about the inflation that arrived a few months after we announced our 2020 changes,” Powell said. “The past five years have been a painful reminder of the hardship that high inflation imposes, especially on those least able to meet the higher costs of necessities.”

The Fed has now returned to its firm commitment to the 2% inflation target. Some critics say that the number is too high and weakens the dollar. Others argue it should be more flexible. But Powell defended the position.

“We believe that our commitment to this target is a key factor helping keep longer-term inflation expectations well anchored,” he said.

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