Federal Reserve Chair Jerome Powell carefully opened the door to an interest-rate cut in September, pointing to rising risks for the labor market even as worries over inflation remain.
“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 said in remarks prepared for the Fed’s annual conference in Jackson Hole, Wyoming on Friday. “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
Now that might sound like much of anything to you–accustomed as you are to daily speech–but in Fed-speak that counts as a major declaration of intent and a remarkable example of clarity.
Investors heard Powell raised the odds that the Fed will cut interest rates by 25 basis points at its September 17 meeting. The S&P 500 Index rebounded from a five-day slide, rising 1.5% and closing just shy of a record high. The small-cap Russell 2000 surged almost 4%. The Nasdaq Composite gained 1.88% and the Nasdaq 100 addd 1.54% . The dollar slid and risk assets like Bitcoin gained. Gold rose 1%. The VIX volatility index, the “fear index” dropped 14.34% to 14.22.
“He used the speech to solidify expectations for 25 basis points in September,” James Bullard, former President of the St. Louis Fed, said in an interview on Bloomberg Television. “He leaned into the most recent labor market report, which was very soft. And so I think that’s a done deal.”
The CME FedWatch Tool basically agrees. Odds of a September interest rate cut rebounded to 83.1% today. Yesterday after remarks from four Fed officials expressing doubts about a September cut odds had tumbled to 75%.
Powell said today that the labor market is in a “curious kind of balance” resulting from a marked slowdown in both the supply of and demand for workers. He cited employment data for July, which showed jobs growth in recent months was substantially weaker than previously reported. “This unusual situation suggests that downside risks to employment are rising,” he said. “If those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
But he continued to argue that policymakers must guard against the prospect that President Donald Trump’s tariffs lead to persistent inflation. He said the effects of tariffs on consumer prices are “now clearly visible,” but it’s reasonable to expect the effects will be relatively short lived. “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,” Powell said.
