Powell's "Curious Balance" Signals Fed Could Shift on Rate Cuts

Fed Chair Jerome Powell’s speech at the Jackson Hole economic policy symposium significantly elevated expectations for a rate cut at the Federal Reserve’s September meeting. In his remarks, Powell acknowledged the rising downside risks to the labor market, including the potential for sharply higher layoffs and rising unemployment. Despite inflation remaining above the central bank’s 2% target, Powell emphasized the Fed’s dual mandate, noting that the shifting balance of risks now suggests the need for an adjustment in monetary policy [1]. This marked a notable shift from the “wait-and-see” approach that had defined the Fed’s strategy earlier in the year [3].

Powell’s comments were interpreted as signaling openness to a 25-basis-point cut at the September 16–17 meeting, though he made it clear that the decision would depend on incoming economic data. The latest employment report showed a sharp slowdown in payroll growth, averaging 35,000 per month from July to May, while the unemployment rate remained at 4.2% [1]. The Fed chair described the labor market as being in a “curious balance,” characterized by a simultaneous decline in both labor supply and demand, which could quickly tip toward higher unemployment. He also noted that while tariffs have driven up prices, their impact on inflation could be short-lived rather than persistent [2].

Investors reacted swiftly to Powell’s speech, with market odds of a September rate cut rising to approximately 85% [2]. Analysts across Wall Street updated their forecasts to anticipate a total of 50 basis points in rate cuts by the end of the year. Stephen Brown of Capital Economics said a September cut now looked “almost nailed on,” while KPMG US economist Diane Swonk acknowledged the Fed’s “caution” amid inflation concerns [3]. The broader S&P 500 index rose by around 1.5% shortly after the speech, reflecting heightened optimism about near-term monetary easing [3].

Despite these developments, Powell underscored that policy decisions would remain data-driven and not on a “preset course.” This aligns with the Fed’s traditional approach, ensuring that policy adjustments are based solely on economic conditions and risk assessments. Analysts like Brian Jacobsen of Annex Wealth Management noted that Powell had demonstrated an “open mind” to the evolving economic landscape [3]. At the same time, officials such as Kansas City Fed President Jeffrey Schmid and Cleveland Fed President Beth Hammack have expressed reservations about cutting rates while inflation remains above target, highlighting the internal debate within the Federal Open Market Committee [2].

Powell’s comments also occurred amid heightened political pressure from President Donald Trump, who has criticized the central bank’s pace of rate cuts and called for Powell’s resignation. Trump also extended his attacks to Fed Governor Lisa Cook, demanding her resignation over alleged mortgage-related misconduct, which Cook has denied. Powell did not explicitly address these political pressures in his speech but reaffirmed the Fed’s commitment to its mandate, stating that it would “never deviate from that approach” [3]. The central bank’s independence and its ability to operate without political influence remain a critical factor in its policy decisions.

As the Fed prepares for its September meeting, the key indicators—particularly the upcoming August employment and inflation reports—will shape its final decision on rate cuts. While Powell’s speech signaled a readiness to respond to downside risks in the labor market, he also stressed the importance of managing inflation risks. This balancing act reflects the Fed’s dual mandate and its ongoing challenge to navigate a complex economic environment marked by both slowing labor demand and lingering price pressures [1].

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[1] Powell hints at long-awaited rate cut but admits Fed in '... (https://www.pbs.org/newshour/show/powell-hints-at-long-awaited-rate-cut-but-admits-fed-in-challenging-situation)

[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] Fed chair Powell boosts expectation of US rate cut (https://www.bbc.com/news/articles/c5ylwyx43x4o)