Fed Weighs Rate Cut as Labor Market Stands on a Precipice

Federal Reserve Chair Jerome Powell indicated that a rate cut is likely in September, with traders now pricing in a 75% probability of a 25-basis-point reduction at the central bank’s upcoming meeting on September 16–17. Powell emphasized during a speech at the Federal Reserve Bank of Kansas City’s Jackson Hole economic policy symposium that the balance of risks is shifting, with growing downside risks to employment and an inflation rate still above the central bank’s 2% target. The remarks suggest the Fed is leaning toward easing policy despite the economic challenges posed by inflation and Trump-era tariffs.

Powell described the labor market as being in a “curious kind of balance” marked by a synchronized slowdown in both the supply and demand for workers. He warned that this fragile equilibrium could unravel quickly, resulting in sharp increases in layoffs and unemployment. The central bank has kept its benchmark interest rate unchanged at 4.25–4.5% since December as it assesses the economic impact of policy shifts, including Trump’s import tariffs, which are pushing up prices and dampening growth. Powell noted that while the baseline expectation is for the inflationary effects of these tariffs to be short-lived, there is a risk they could trigger a more persistent inflation dynamic that could complicate the Fed’s dual mandate of price stability and full employment.

The Fed’s decision to cut rates would be a significant pivot, given its historical restraint this year. Officials are now placing considerable weight on upcoming economic data, particularly the September 5 jobs report and the following week’s inflation data, which will help shape the final decision. Market participants have already adjusted their expectations, with some analysts revising forecasts to include a 50-basis-point reduction by the end of the year. This shift reflects a broader recognition that the labor market is weakening, with recent employment gains averaging just 35,000 per month in the May–July period, despite the unemployment rate remaining at 4.2%.

Powell also underscored the importance of the Fed’s new strategic framework, which clarifies that its mandate for maximum employment is contingent on achieving price stability. This framing reinforces the central bank’s commitment to balancing its dual goals without prioritizing one over the other. While some Fed officials, including Governor Christopher Waller, argue that the effects of tariffs are temporary and that a rate cut is warranted to support the labor market, others remain cautious, particularly those with a more hawkish stance such as Kansas City Fed President Jeffrey Schmid and Cleveland Fed Chief Beth Hammack.

Trump, who has been vocal in his criticism of the Fed and its policies, continues to pressure Powell and other officials to cut rates more aggressively. The president has even suggested firing Fed Governor Lisa Cook, who is under investigation by the Department of Justice for alleged misstatements about her mortgages. Despite this political pressure, Powell has maintained that the Fed operates independently and makes decisions based on economic fundamentals rather than political considerations. He has reiterated his intent to serve the remainder of his term, which ends in May, and has dismissed calls for immediate rate cuts as misaligned with the Fed’s long-term objectives.

The upcoming September meeting will be a critical test for the Fed as it weighs the risks and benefits of rate reductions in a shifting economic landscape. The central bank’s ability to navigate these challenges will be closely watched by investors, businesses, and policymakers alike as the economy continues to adjust to the broader implications of Trump’s economic policies and global market dynamics.

Source: [1] Fed's Powell signals likely September interest rate cut (https://www.usatoday.com/story/money/2025/08/22/fed-powell-september-rate-cut/85768429007/) [2] Powell says Fed may need to cut rates, will proceed carefully (https://www.reuters.com/markets/wealth/powell-says-fed-may-need-cut-rates-will-proceed-carefully-2025-08-22/) [3] US Fed Reserve Chair Powell opens door to September rate cut (https://www.aljazeera.com/economy/2025/8/22/us-fed-reserve-chair-powell-opens-door-to-september-rate-cut)