Federal Reserve chair Jerome Powell suggested that interest rate cuts may be on the horizon as the balance of risks in the US economy shifts, using his final speech at the Jackson Hole Economic Policy Symposium to signal a cautious but evolving policy stance.
“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation,” Powell said, noting that this unusual combination could prompt the central bank to adjust rates in order to support growth.
“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.
He emphasized, however, that “monetary policy is not on a preset course,” and decisions would remain strictly data-driven.
Powell described an economy that has been resilient but is showing clear signs of slowing.
The July jobs report revealed payroll growth averaging just 35,000 over the past three months, compared with 168,000 during 2024, while GDP growth slipped to 1.2% in the first half of this year from 2.5% last year.
Inflation has eased substantially from its post-pandemic highs but remains above target, with core PCE prices rising 2.9% over the past year.
Tariffs have begun to push goods prices higher, but Powell noted that the impact was likely “a one-time shift in the price level” rather than the start of an enduring inflation problem.
Still, he acknowledged that the risks of both persistent inflation and a weakening labor market must now be weighed carefully.
The speech also marked the release of the Fed’s revised long-term policy framework, the product of its five-year review.
Among the changes, the central bank abandoned the 2020 “makeup” strategy of tolerating moderate overshoots of inflation, with Powell stating that “there was nothing intentional or moderate about the inflation that arrived a few months after we announced our 2020 changes.”
The Fed also shifted away from its “shortfalls” language on employment, clarifying that risks can emerge from both overly tight and overly weak labor markets.
More dovish than expected
Deutsche Bank analysts noted that Powell’s speech was more dovish than they had expected.
As a result, they see a 25 basis point cut in September as most likely, followed by 25 basis point reductions in December and March.
The highlighted two key points, the first that Powell expressed growing concern about the labor market, noting slower job growth and rising downside risks, which could prompt rapid increases in layoffs and unemployment.
Second, he suggested that the current restrictive policy stance, combined with shifting risks, might justify adjusting policy soon, without tying this to specific upcoming data.
“This showed increased concern around the labor market picture that could potentially warrant a policy response,” the analyst wrote.
Stocks surge on rate cut optimism
Investors welcomed Powell’s remarks, sending the Dow Jones 2.1% higher, the Nasdaq 1.8% higher and the S&P 500 up 1.6%.
Chris Beauchamp, IG chief market analyst, wrote that for once, the Fed chairman may have pleased the White House by signalling a September rate cut is more likely.
“Stocks have surged in the wake of his speech, with the S&P 500 clawing back almost all the losses this week and indices in both the US and Europe firmly in positive territory,” he said.
“Worries about higher inflation have been cast aside for now, as investors look forward to the US economy powering ahead in the autumn.”
At the same time, the dollar slumped, which put gold on the front foot, up 1% trading at about $3,415 per ounce.
“All told it has been the perfect session for stock bulls and dollar bears, and now all eyes shift to Nvidia’s earnings next week,” Beauchamp said.
- Updated with analyst comments, share price movement -