Federal Reserve Chairman Jerome Powell on Friday pointed out the high levels of uncertainty that makes jobs difficult for financial policymakers, making it slippery, indicating the potential for interest rate cuts.
In his much-anticipated speech at the Fed’s annual Conclave in Jackson Hole, Wyoming, the central bank leader in prepared remarks cited “changes in sweep” in tax, trade and immigration policies. As a result, “it appears to be a change in the balance of risk” between the Fed’s full-employment twin goals and stable prices.
Watching Powell share his comments live
He said the labor market remains in good condition and the economy shows “resilience,” but he said the risks on the negative side are increasing. At the same time, he said tariffs are pose a risk that inflation could rise again.
The Fed’s benchmark rate is below the full percentage points that Powell gave his keynote a year ago, and the unemployment rate is still low, so the conditions allow him to “go cautiously when considering changes to his policy stance,” Powell said.
“Nevertheless, as policy is in a restricted area, the balance between baseline outlook and changing risk may need to adjust our policy attitude,” he added.
It was as close as he came during his speech, and supported the rate cuts Wall Street widely believes when the Federal Open Market Committee meets next September 16-17.
But the statement is enough to spike stocks, and the Treasury will fall. The Dow Jones industrial average showed more than 600 points of profit from the release of Powell’s speech, with a policy-sensitive two-year Treasury memo that dropped to about 3.71%, down from 0.08% points.
In addition to market expectations, President Donald Trump has called for aggressive cuts from the Fed in a painful public attack that was robbed by Powell and his colleagues.
The Fed has maintained its benchmark borrowing rate at 4.25% to 4.5% since December. Policymakers continue to cite the uncertain impact of tariffs on inflation as reasons for their involvement, and believe that the current economic situation and slightly restrictive policy stance allow time to make further decisions.
The importance of Fed independence
Although it has not addressed the White House demands, the low-cost demands in particular focused on the importance of Fed independence.
“FOMC members make these decisions based solely on the assessment of data and the impact on the balance of economic outlook and risk. We will not deviate from that approach,” he said.
This speech is a flux situation in the ongoing negotiations between the White House and its global trading partners, and often happens without clarifying where it will end. Recent metrics show that consumer prices are gradually increasing, but wholesale costs are rising more rapidly.
From the Trump administration’s view, tariffs guarantee interest rate cuts as they do not cause permanent inflation. Powell’s position in his speech was that various outcomes were possible, and the “rational basic case” was that the impact of tariffs would be “short-lived, one-off changes in price levels.” But he said at this point there was nothing certain.
“It will continue to take time to increase tariffs through the supply chain and distribution network,” Powell said. “And more, tariff rates may continue to evolve and extend the adjustment process.”
In addition to summarizing current conditions and potential outcomes, the speech touched on a review of the Fed’s five-year policy framework. This review has resulted in some notable changes since the central bank last performed its task in 2020.
At the time, in the midst of Covid Pandemic, the Fed switched to a “flexible average inflation targeting” regime. This will allow the central bank’s 2% target to reach its 2% after a long period of time with inflation below that level. The result is that policymakers could be patients with slightly higher inflation if they meant ensuring a more comprehensive labour market recovery.
However, shortly after the strategy was adopted, inflation began to rise, eventually reaching 40-year highs, but policymakers largely dismissed the rise as “temporary” and did not require hiking rates. Powell focused on the harmful effects of inflation and lessons learned.
“After all, the idea of intentional, moderate inflation overshooting proved unrelated. As we publicly acknowledged in 2021, no inflation arrived months after the announcement of the 2020 consensus statement changes,” Powell said. “The past five years have been a painful reminder of the difficulties high inflation imposes, especially for those who are unable to meet the cost of high needs.”
Additionally, during the review, the Fed reaffirmed its commitment to a 2% inflation target. Critics on both sides of the issue, some suggesting that rates can be too high and the dollar can be weak, while others believe central banks need to be flexible.
“We believe our commitment to this goal is a key factor that will help us to fully secure long-term inflation expectations,” Powell said.
