Federal Reserve chair Jay Powell has cleared the way for the US central bank to cut rates next month. But a duo of economic reports could still upend Wall Street bets on lower borrowing costs.
Powell used his speech at the Kansas City Fed’s confab in Jackson Hole, Wyoming, to signal that growing risks from high borrowing costs will damage the jobs market.
That means a rate cut could be warranted as soon as September.
US stocks and bonds roared higher as investors cranked up bets that the Fed will soon begin cutting rates after holding them steady so far this year on concerns that Donald Trump’s tariffs will cause severe inflation.
Futures markets now point to a 75 per cent chance the Fed reduces its main rate by a quarter point when it meets in mid-September. Many Wall Street economists expect more reductions in the federal funds rate, which is now in a 4.25 to 4.5 per cent range, later in 2025.
However, investors, economists and some Fed officials say that upcoming data on inflation and the labour market could still disrupt those plans.
“[Powell’s] conclusion that ‘with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance’ is a clear indication that a September rate cut is now the most likely outcome,” Stephen Brown at Capital Economics wrote.
“Nevertheless, the chair’s lingering caution suggests that either a very positive August employment report or a much more concerning set of price data could still trigger a delay,” he added.
The debate comes as both sides of the Fed’s dual mandate to foster maximum sustainable employment and price stability are coming into tension. “Risks to inflation are tilted to the upside, and risks to employment to the downside — a challenging situation,” Powell said on Friday.
July jobs figures that pointed to a sharp slowdown in hiring growth this summer — which were released after the Fed’s last meeting — pointed to rising strains in the labour market.
The unemployment rate has remained subdued at 4.2 per cent, which helped offset some of those worries.
At the same time, there is a debate raging at the Fed and on Wall Street on whether Trump’s sweeping tariffs on trading partners will cause a sustained burst of inflation, or a one-time price increase.
Many businesses have noted that the levies will begin to more severely affect their costs once they cycle through their pre-tariff inventory. But so far, the impact of consumer prices has been subtle, with that inflation measure running at an annual pace of 2.7 per cent in July.
The Fed’s preferred personal consumption expenditures price index increased at an annual pace of 2.6 per cent in June, above the central bank’s target of 2 per cent.
A one-off jump in prices would be more manageable than a more persistent increase because it is less likely to unanchor consumers’ expectations for long-run inflation.
Powell noted in his speech that “we will not allow a one-time increase in the price level to become an ongoing inflation problem”.
The August jobs and consumer price index reports, scheduled for September 5 and 11, respectively, will provide the most important near-term signals on both of those factors.
Michael Gapen at Morgan Stanley said that while Powell’s speech pointed to a “new, more dovish skew . . . it does not definitively say the Fed will cut in September, but it comes about as close as it can given the data between now and then.”
Several members of the Fed’s rate-setting Federal Open Market Committee also remain deeply unsure of how Trump’s tariffs will play out.
Alberto Musalem, head of the St Louis Fed and an FOMC voter this year, said after Powell’s remarks that inflation was running closer to 3 per cent than the Fed’s 2 per cent goal.
“There is a possibility, not the base case, that there could be some persistence,” Musalem told Reuters.
Susan Collins, president of the Boston Fed and another voting member, had told Bloomberg ahead of the speech that there were still “arguments for taking a bit more time”.
She added: “It’s not a done deal in terms of what we do with the next meeting. And we’re going to get more data between now and then.”
Kansas City Fed chief Jeff Schmid has said he thinks the labour market remains solid, while Chicago Fed president Austan Goolsbee has indicated that he is concerned about persistent inflation in the vast services sector.
The debate comes as Powell contends with a fierce campaign from the White House against him and other top Fed officials. Trump has said the central bank should drastically cut rates to just 1 per cent and labelled its chair a “numbskull” and a “moron” who is always “too late”.
In what is set to be his final Jackson Hole symposium appearance as chair, attendees viewed Powell’s remarks as a masterclass in presenting the case for lower borrowing costs in language that did not look as though he was buckling to extreme pressure from the White House.
He also received a standing ovation from central bankers at the symposium, well aware that political attacks on the monetary guardians are not confined to the US.
Some feel Powell’s fight is theirs too, while the Trump administration’s attacks have provoked soul-searching in others as to why central bankers are proving such easy targets for populists on both sides of the political spectrum.
The Fed chair has also faced milder dissent from within the FOMC. Two of his fellow governors, Michelle Bowman and Christopher Waller, who are seen as contenders to replace Powell when his term as chair ends next May, backed a quarter-point cut at the last vote in July — the first time two governors had not voted with the chair on interest rates since 1993.
Stephen Miran, Trump’s nominee to replace Adriana Kugler on the Fed’s board, is also likely to back a cut — should the Senate confirm his appointment ahead of the FOMC vote.
