Powell Opens the Door: Markets Bet 91% on September Rate Cut After Dovish Jackson Hole Speech

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Federal Reserve Chair Jerome Powell used his Jackson Hole speech Friday to send a clear message to markets: the balance of risks has shifted, and the path is opening for rate cuts as soon as the September meeting. Equity markets rallied sharply on the dovish undertones, while futures tied to the Fed funds rate spiked, with traders now assigning a 91% probability of a September cut compared to 72% just before Powell spoke. The market read was unambiguous—the Fed may still be “data dependent,” but the bar for action has been lowered.

Powell framed his remarks around the unusual economic crosscurrents facing the U.S. economy. Inflation, though still above the Fed’s 2% target, has moved materially lower from its pandemic-era peaks. The latest reading showed July PCE at 2.6% headline and 2.9% core, both slightly higher than June, but Powell emphasized that services inflation is trending lower while housing remains on a cooling trajectory. Tariffs, however, are now a visible driver of higher goods prices, and Powell acknowledged that their effects will accumulate in the coming months. The key shift was his characterization of these tariff impacts as largely a one-time adjustment rather than the start of an entrenched inflation cycle, a more dovish framing than in his July 30 press conference.

The labor market was another focal point, with Powell striking a cautious but supportive tone. He highlighted the sharp slowdown in payroll growth to just 35,000 jobs per month over the past three months, down from 168,000 in 2024. This marked deceleration, amplified by downward revisions to earlier data, underscores growing downside risks. Still, Powell noted that unemployment at 4.2% remains historically low, and other indicators like vacancies, quits, and wage growth have softened only modestly. In his words, the labor market is in a “curious balance,” where both supply and demand for workers are slowing together. That unusual dynamic, he warned, raises the risk of a sudden jump in layoffs if demand falters further. For markets, this tilt toward acknowledging rising employment risks reinforced the perception that the Fed is ready to act to protect jobs.

Tariffs emerged as a structural theme throughout the speech. Powell stressed that significantly higher trade barriers are remaking the global trading system, pushing up prices for goods and reshaping supply chains. He described the pass-through as still unfolding, with uncertainty around timing and magnitude. Importantly, he said the base case remains that tariff-related price hikes represent a one-off level adjustment rather than a persistent inflation trend. However, he conceded that the risk of wage–price dynamics or drifting inflation expectations is real and must be monitored. Compared to July’s warnings that tariffs could entrench inflation if firms used them as cover for price hikes, this was a more tempered assessment—one that reassured investors that the Fed is unlikely to overreact to tariff-induced price increases.

On monetary policy, Powell leaned into flexibility. He reminded his audience that policy is “100 basis points closer to neutral than a year ago,” suggesting that the Fed’s restrictive stance could soon require recalibration. With risks now tilted toward weaker employment and softer growth, he signaled that the FOMC is prepared to adjust its stance if necessary. Importantly, he unveiled revisions to the Fed’s longer-run policy framework, scrapping the 2020-era “makeup” strategy that tolerated inflation overshoots and returning to a straightforward 2% inflation target. This reaffirmation of commitment to price stability, paired with the acknowledgment of employment downside risks, struck markets as a dovish balance.

Investors seized on the nuance. The S&P 500 surged more than 1% intraday as Powell spoke, with cyclical sectors and rate-sensitive names leading. The Nasdaq jumped as much as 1.5%, powered by the prospect of cheaper financing costs supporting growth stocks. Treasury yields slipped at the front end of the curve as traders rushed to price in September easing, while longer-dated yields held firmer on concerns about tariff-driven inflation. The dollar eased modestly against major peers, reflecting the dovish tilt.

The CME FedWatch tool captured the shift in expectations: the odds of a quarter-point cut in September jumped to 91% from 72% before the speech, while traders increased bets on further cuts by year-end. Powell did not commit explicitly to a September move, stressing that the Fed will weigh incoming data, but his comments lowered the threshold. With another jobs report, CPI, and PPI still due before the September 17 decision, the data need not be spectacularly weak—simply not uncooperative.

Powell’s tone also underscored his intent to preserve the Fed’s independence. He reiterated that decisions are made on the basis of economic data, not politics, an implicit rebuttal to pressure from the administration for faster easing. Still, the market interpreted his language as pragmatic rather than defensive—he is aware of the political noise but guided by the Fed’s dual mandate.

The implications extend beyond September. By positioning tariffs as a manageable inflationary force and highlighting labor market downside risks, Powell set the stage for a more accommodative stance into late 2025. That said, he maintained flexibility, reminding markets that monetary policy is not on a preset course. If inflation expectations were to drift higher or wage–price spirals emerge, the Fed would respond forcefully. For now, though, the message was clear: policy is restrictive, risks are shifting, and cuts are on the table.

Equity markets welcomed that clarity after weeks of uncertainty. A string of hot data earlier in August had cooled expectations for easing, and Fed officials had pushed back against premature bets. By acknowledging the growing asymmetry in risks, Powell effectively recalibrated expectations. Traders now believe the hurdle for a September cut has dropped considerably.

In conclusion, Powell’s Jackson Hole speech marked a dovish turn in tone compared to his July 30 press conference. Inflation remains above target, but tariff-driven pressures are framed as temporary. The labor market is still stable, but downside risks are mounting. Policy is restrictive, and the Fed is inching closer to neutral. With markets pricing in a near-certainty of September easing, attention will turn to upcoming jobs and inflation data. The Fed chair may not have promised cuts, but he cleared the path for them, and Wall Street is running with it.