(Bloomberg) — 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.”
Following Powell’s remarks, investors boosted bets that the Federal Open Market Committee would cut rates at its Sept. 16-17 meeting. Economists at Deutsche Bank, Barclays and BNP Paribas pulled forward their forecasts for the next rate cut to September.
“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 signal comes at a time when Fed officials are divided over how and when to adjust policy in the coming months. Some have pointed to the labor market’s resilience. Others warn that nascent signs of weakness in employment could metastasize into a more significant downturn.
Powell said 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.
“When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate,” he added.
Treasury yields tumbled, the S&P 500 extended gains and the dollar fell.
Powell’s speech comes amid unprecedented pressure from President Donald Trump and his allies aimed at getting the central bank to lower borrowing costs, threatening the Fed’s independence in determining monetary policy. As Powell took the podium, the gathered central bankers and economists showed their support by giving him a standing ovation.
Following the speech Trump told reporters the Fed should have lowered rates a year ago. “We call him ‘Too Late’ for a reason,” he said.
Trump took his pressure campaign to a new level on Friday. As Powell was speaking, the president said he would fire Fed Governor Lisa Cook if she doesn’t resign. Trump had already called on Cook to depart over allegations that she provided false information in applying for two mortgages. Cook, who is at the Jackson Hole conference, responded Wednesday that she had no intention of stepping down.
Powell didn’t address the Cook affair in his remarks and didn’t take questions from the audience of central bankers and economists.
Framework Changes
The Fed chair also outlined changes officials made to their monetary policy framework, the longer-term strategy that guides the Fed’s decisions.
Those changes included clarifying a shift made in 2020 that signaled officials would not lift interest rates when the unemployment rate is low to head off potential inflation.
Powell said policymakers still agree that it may not be necessary to raise rates “based solely on” their estimates for where the unemployment rate should settle over the long term. But, he added, the revision in 2020 was never intended to “permanently forswear” the ability to raise interest rates when the labor market is strong in anticipation of higher inflation.
In the changes announced Friday, officials removed wording that previously said decisions would be informed by their assessment of “shortfalls of employment from its maximum level.” They instead adopted language that more specifically states “that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability.”
The adjustment suggests less tolerance of a hot labor market, but keeps the Fed’s options open on how it would respond.
“The changes to the policy framework give the Fed more latitude to deal with the post pandemic economy, which is more volatility and less predictable than the slow-moving economy we saw pre-pandemic,” said Diane Swonk, chief economist for KPMG.
Officials also reaffirmed their 2% inflation goal and the importance of keeping inflation expectations anchored. But policymakers scrapped an approach unveiled in 2020 that called for tolerating above-target inflation to make up for periods of undershooting the goal. And they removed language that characterized low interest rates as a “defining feature of the economic landscape,” Powell said.
Read More: Fed Revisits Preemptive Tightening Debate in 2025 Policy Review
Rate Debate
Powell’s remarks fall somewhere between sentiments expressed by other policymakers in recent days and weeks.
Cleveland Fed President Beth Hammack said Thursday that recent inflation data would prevent her from supporting a cut if officials were meeting this week. Her counterpart from Kansas City, Jeff Schmid, sounded similarly cautious in an interview that aired Thursday, while Atlanta Fed President Raphael Bostic said he still sees just one rate cut this year as appropriate.
Officials cut rates three times near the end of 2024, but have this year kept their benchmark unchanged. Powell and other officials have argued for a patient approach out of concern the tariffs could spur sustained inflation. Those worries were supported by recent inflation data that showed wholesale prices rose in July at the fastest pace in three years.
While in June a majority of the Fed’s officials estimated they’d cut rates twice this year, a sizable minority saw just one or no cuts all. Since then, the labor market has weakened but progress on cooling inflation has also stalled.
Several policymakers have highlighted signs of weakness in the labor market, with some arguing explicitly that the Fed should begin lowering rates again. Fed Governors Christopher Waller and Michelle Bowman dissented against the Fed’s decision in July to leave rates unchanged, citing the labor market.
And following a surprisingly weak jobs report for July released days later, San Francisco Fed President Mary Daly and Minneapolis Fed chief Neel Kashkari signaled they might support a cut in September.
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