Powell's Final Stand: Will the Fed Cut Rates or Let Trump's Shadow Shape Policy?

Federal Reserve Chair Jerome Powell is set to deliver a pivotal speech at the Jackson Hole economic policy summit on Friday, a key moment for U.S. monetary policy as the central bank weighs its next steps amid a fragile labor market and rising inflation. The speech is anticipated as one of the final major public addresses from Powell before his term as Fed chair expires in May 2026, and with his reappointment by President Donald Trump unlikely, the stakes for the remarks are heightened. Analysts and market participants are closely watching for any indication of whether the Fed will resume rate cuts in September following a series of pauses in 2025.

The U.S. economy has shown mixed signals in recent months. While the labor market has remained near full employment, recent data has pointed to a slowing job creation trend. The July jobs report revealed just 73,000 jobs added—well below the 110,000 estimate—while May and June employment figures were revised downward by 258,000. The three-month average of job gains has fallen to just over 35,000, signaling a significant slowdown. Meanwhile, the unemployment rate has edged up to 4.3%. These developments raise concerns that the labor market, once a pillar of economic resilience, is beginning to soften.

On the inflation front, the central bank has faced renewed challenges. Although inflation has declined from its 41-year highs in 2022, it has trended higher in recent months due to the impact of tariffs introduced under the Trump administration. The personal consumption expenditures (PCE) index, the Fed’s preferred inflation gauge, has risen from a 2025 low of 2.1% in April to 2.3% in May and 2.6% in June—well above the central bank’s 2% target. The upcoming release of the July PCE report on August 29 will offer further insight into whether inflationary pressures are stabilizing or intensifying.

In the past, Powell has used the Jackson Hole platform to signal major policy shifts. In 2024, for instance, he confirmed the Fed's first rate cuts in over a year, citing the need for "policy to adjust." This year, however, the Fed has maintained the benchmark federal funds rate within the 4.25% to 4.5% range since May 2025 amid policy uncertainty. In the last monetary policy meeting, a rare dual dissent emerged as Fed Governors Michelle Bowman and Christopher Waller voted in favor of a 25-basis-point rate cut, marking the first such dissent in favor of cuts since 1993. Despite the dissent, the Federal Open Market Committee (FOMC) voted 9-2 to keep rates unchanged.

Financial markets remain divided over what Powell will say. As of the latest data, traders are pricing in an 83% probability of a rate cut in September, based on Fed funds futures. Analysts have outlined at least three possible scenarios: a clear signal for a cut, a cautious rejection of market expectations, or a noncommittal stance emphasizing data dependency. Evercore ISI analysts warned that a smaller-than-expected rate cut could lead to a stock market pullback of up to 15% in the short term, given the current valuation levels and seasonal trends. Goldman Sachs, however, has expressed confidence that weak labor data has already influenced the Fed's decision-making, suggesting rate cuts are on the horizon.

The broader economic environment adds another layer of complexity. Trump’s political rhetoric has further clouded the outlook, as his public criticisms of Powell and recent personnel changes, such as the firing of the Bureau of Labor Statistics head, have raised concerns about the integrity of key economic data. In this context, Powell’s speech will be more than a policy update—it may serve as a crucial barometer for the Fed’s strategic approach during a period of economic and political transition.

Source: [1] Fed chair Powell to speak at Jackson Hole amid rate cut ... (https://www.foxbusiness.com/economy/powell-faces-economic-crossroads-jackson-hole-speech-fed-chair-tenure-nears-end) [2] Fed Chair Powell's Jackson Hole Speech Could Jolt Markets (https://www.investopedia.com/fed-chair-powell-jackson-hole-speech-could-jolt-markets-evercore-warns-of-15-percent-drop-11793169) [3] What to Expect from Fed Chair Powell's Speech on Friday (https://www.investopedia.com/what-to-expect-from-fed-chair-powell-s-big-speech-friday-11792908)