Powell Holds the Line: Markets Slip as September Cut Hopes Fade

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Equity markets edged lower Tuesday as Federal Reserve Chair Jerome Powell delivered a press conference that, while steady and data‑focused, disappointed doves hoping for a clearer hint of a September rate cut. Instead, Powell reiterated the Fed’s commitment to its dual mandate of maximum employment and stable prices, leaving rates unchanged and emphasizing that upcoming economic data will be decisive in shaping policy. While he stopped short of ruling out a September move, Powell’s refusal to endorse market hopes pushed futures pricing for a cut down from 61% before his remarks to 53% afterward — a level historically too low for the Fed to act.

Powell acknowledged that growth has moderated, with GDP rising just 1.2% in the first half of the year compared with 2.5% in 2024. Q2’s stronger 3% pace smoothed some volatility, but weaker consumer spending and persistent softness in housing weighed on momentum. He noted that consumer spending, long a pillar of the expansion, has “finally slowed” after years of resilience, though banks and credit card firms still see household finances in solid shape, with delinquencies not yet a pressing problem.

On the labor market, Powell said conditions remain solid, with the unemployment rate at 4.1% and payroll gains averaging 150,000 per month. Still, he acknowledged private‑sector job creation has slowed, with some measures suggesting it could be near zero. That slowdown has been matched by weaker labor force growth, partly due to immigration policy, leaving supply and demand for workers in balance. “We’re watching closely,” Powell said, while stressing that maximum employment remains consistent with the Fed’s mandate.

Inflation was a central theme. Powell noted that price pressures have eased significantly since their mid‑2022 peak but remain “somewhat elevated.” Powell expects to see Total PCE inflation rise 2.5% year‑over‑year in June, while core PCE should register 2.7%, when these figures hit tomorrow at 8:30am ET. Services inflation continues to ease, but tariffs are increasingly pushing up goods prices. Powell flagged that tariff revenues are now running around $30 billion per month, with much of the burden initially borne upstream. Still, he warned that companies intend to pass costs along to consumers, though the extent and timing remain uncertain.

Powell described tariff‑driven inflation as likely a one‑time price shock rather than a sustained trend, but he cautioned that it could prove more persistent. “Our obligation is to keep longer‑term inflation expectations well anchored and to prevent a one‑time increase in the price level from becoming an ongoing inflation problem,” he said. He underscored the Fed’s willingness to act if inflation risks evolve, but emphasized efficiency — moving neither too quickly nor too late to avoid unnecessary damage to the labor market.

When pressed on the possibility of a September cut, Powell declined to commit, noting the Fed will have two additional jobs reports and two rounds of inflation data before its next meeting. “We’ve made no decisions about September,” he said. “We will be taking that information into consideration and all the other information we get.” His refusal to dismiss a cut outright may signal a lower bar for action if data remain steady, but the lack of a dovish tilt left markets unconvinced.

The Fed chair also commented on financial conditions, calling current policy “modestly restrictive.” He emphasized that the economy is not being held back inappropriately, with financial conditions still accommodative in some respects. This reinforces the Fed’s stance that it sees no urgency to loosen policy absent clearer signs of labor market weakness or inflation falling decisively toward target.

Looking ahead, Powell highlighted two near‑term milestones: the release of the Personal Consumption Expenditures (PCE) index tomorrow, and the July jobs report on Friday. PCE is expected to come in roughly in line with the Fed’s current assessment, offering little new direction. The jobs report, however, could prove more pivotal, especially if payroll growth continues to slow or unemployment ticks higher.

Markets will also be watching the Fed’s annual Jackson Hole symposium in three weeks, a venue Powell has often used to set policy direction. Analysts note this could be the moment for the Fed to either pivot toward easing or double down on a patient, data‑dependent stance.

For now, the equity market’s reaction was negative, reflecting disappointment among investors who had priced in a stronger dovish signal. Futures markets show a 53% chance of a September rate cut and 65% odds of another in December, both down from earlier levels. Historically, the Fed has not cut with market expectations below 60%, making the hurdle for action higher.

The bottom line: Powell delivered continuity, not clarity. His remarks reinforced that the Fed will let incoming data guide decisions, leaving markets to watch PCE tomorrow, Friday’s jobs report, and Jackson Hole for hints on the policy path. Until then, attention is likely to shift back to the flood of earnings reports, as investors weigh corporate fundamentals against macro uncertainty.