Powell's Final Act: Balancing Rates, Politics, and the Fed’s Future

Federal Reserve Chair Jerome Powell is set to deliver what is likely his final speech at the central bank’s annual Jackson Hole symposium, a high-stakes event occurring amid significant policy and political tensions. Investors and analysts are closely watching for signals on whether the Fed will move toward a rate cut in September and how Powell will address the growing political pressure from the Trump administration. The U.S. bond market has reflected shifting expectations, with traders pricing in a 70-75% chance of a 25-basis-point rate cut at the next meeting, down from earlier optimism.

The speech will focus on the economic outlook and the Fed’s long-term policy framework, a topic that will have implications beyond Powell’s tenure. Recent economic data has been mixed, with a weak July jobs report and downward revisions to May and June figures, which have fueled speculation about a rate cut. However, inflation remains above the Fed’s 2% target, and several policymakers, including Fed Governor Lisa Cook, have come under scrutiny from the White House. This scrutiny has intensified concerns about the central bank’s independence, a principle Powell has consistently defended.

Powell is expected to maintain his usual measured tone, avoiding direct commitments while emphasizing the data-dependent nature of the Fed’s decisions. Goldman Sachs and Deutsche Bank have noted that while a September cut is likely, it may not be explicitly confirmed. The challenge lies in balancing the risks of inflation against the cooling labor market. Regional Fed officials, including Kansas City’s Jeffrey Schmid and Cleveland’s Beth Hammack, have expressed cautious optimism, highlighting the need for more data before deciding on policy shifts.

The bond market has shown some resilience to these uncertainties, with the 10-year Treasury yield holding steady around 4.31% ahead of the speech. Shorter-term yields, including the 2-year note, have edged higher, indicating a shift toward more hawkish expectations. Treasury data also shows that the 10-year real yield derived from TIPS stands at 1.92%, reflecting inflation concerns. The dollar, meanwhile, has strengthened against a basket of currencies, with the U.S. Dollar Index trading near a two-week high of 98.72, as traders scale back bets for aggressive easing.

The implications of Powell’s speech extend beyond U.S. borders. The euro and sterling have weakened against the dollar, with the EUR/USD pair retreating to 1.1604, its lowest since early August. Strong U.S. economic data, including a better-than-expected S&P Global Manufacturing PMI, has bolstered the dollar’s appeal. However, divergent central bank policies, with the European Central Bank expected to hold rates, continue to support the euro’s medium-term strength. Analysts at Rabobank and Commonwealth Bank of Australia highlight that Powell’s stance will be critical in determining the dollar’s immediate direction, with a dovish outcome potentially limiting upside gains.

The speech also presents an opportunity for Powell to reaffirm the Fed’s independence and policy framework. The 2020 adoption of flexible average inflation targeting has been criticized for contributing to inflation overshoots, and there are expectations that Powell will signal a shift toward a more preemptive approach. Deutsche Bank economist Matthew Luzzetti anticipates that the Fed will roll back the 2020 modifications to focus on inflation control. This long-term strategic shift is seen as vital for maintaining credibility in an environment where inflation remains a pressing concern.

As Powell prepares to deliver his speech, the stakes are high for both the central bank and the global economy. The speech is expected to influence not only the timing of rate cuts but also the broader trajectory of monetary policy. With the Fed facing a delicate balancing act between inflation and employment, the clarity Powell provides will shape market expectations for the remainder of the year and beyond.

Source:

[1] Powell to deliver Jackson Hole speech Friday. What Wall ... (https://www.cnbc.com/2025/08/21/powell-to-deliver-jackson-hole-speech-friday-what-wall-street-expects.html)

[2] Powell set for final Jackson Hole speech as policy, politics ... (https://finance.yahoo.com/news/powell-set-for-final-jackson-hole-speech-as-policy-politics-raise-questions-that-will-outlast-his-tenure-174606990.html)

[3] Jerome Powell is set to deliver a speech with high stakes (https://www.npr.org/2025/08/21/nx-s1-5509586/federal-reserve-jerome-powell-jackson-hole-speech)

[4] Currencies tread with caution ahead of Powell's speech (https://www.reuters.com/world/africa/currencies-tread-with-caution-ahead-powells-speech-2025-08-22/)

[5] Dollar firms as traders pare rate cut bets ahead of Powell speech (https://finance.yahoo.com/news/currencies-tread-caution-ahead-powells-013624610.html)

[6] EUR/USD retreats as strong US PMI lifts Dollar, Powell in ... (https://www.fxstreet.com/news/eur-usd-retreats-as-strong-us-pmi-lifts-dollar-powell-in-focus-202508212204)