Powell's Speech Could Force Fed into a Historic Policy U-Turn

Federal Reserve Chair Jerome Powell is set to deliver a pivotal speech this Friday at the Jackson Hole economic policy symposium, with markets and analysts closely watching for signals on the central bank’s future monetary policy. The speech is expected to provide clarity on whether the Fed will implement a rate cut in September and how it plans to adjust its broader policy framework. With inflation still above the Fed’s 2% target and labor market dynamics evolving, the speech could have lasting implications for both the economy and financial markets.

One of the key topics of focus is the potential shift in the Fed’s policy framework, particularly the possible abandonment of the average inflation targeting (AIT) strategy adopted in 2020. This framework was designed to allow inflation to temporarily exceed 2% to compensate for periods when it fell below the target, aiming to stabilize long-term inflation expectations. However, recent inflation trends—spurred in part by supply chain disruptions and tariff impacts—have led many to argue that AIT contributed to a delayed response in tightening monetary policy. Powell is expected to signal a return to a more traditional approach, focusing on maintaining a strict 2% inflation target.

The labor market has also been a key factor in the Fed’s deliberations. Recent employment data shows a slower pace of job growth, with just 73,000 jobs added in July, down from previous months. This has raised concerns among some Fed officials about the health of the labor market. Federal Reserve Bank of Atlanta President Raphael Bostic and others have suggested that the Fed should consider a rate cut in response to the weakening labor data. The tension between inflationary pressures and employment concerns is at the heart of the Fed’s current policy dilemma, and Powell’s speech may offer insight into how the central bank plans to navigate this dual mandate.

Market expectations are already pricing in a 25 basis point rate cut in September, but analysts caution that Powell is unlikely to commit explicitly to such a move. A note from JPMorgan highlights that while the labor market has softened, the case for a cut has not been fully made, and more data will be needed before a definitive policy shift occurs. Similarly, Evercore ISI warns that if Powell signals a more cautious approach—falling short of confirming a rate cut—markets could experience a sharp correction, with equities potentially retreating by as much as 15% into October.

The broader economic environment also plays a role in shaping the Fed’s decision. Recent inflation data, while showing a mixed picture, suggests that the impact of tariffs on prices may not be as severe as initially feared. However, producer price index (PPI) data indicates that inflationary pressures remain elevated in the services sector, a concern for Fed officials. Additionally, President Donald Trump has continued to publicly pressure Powell to cut rates, even criticizing the chair for being “grossly incompetent.” Despite these pressures, most analysts agree that the Fed should act based on economic data rather than political considerations, emphasizing the importance of maintaining policy independence.

Looking ahead, Powell’s speech will be closely analyzed for any hints on the Fed’s policy path. If he signals a rate cut, it could provide a much-needed boost to markets, which have been on edge over the potential for a policy delay. Conversely, if he suggests a wait-and-see approach, investors may face a period of heightened volatility. The speech represents not just an immediate policy signal but also a potential pivot in the Fed’s long-term strategy, with implications that could extend well beyond Powell’s tenure.

Source:

[1] Powell's Jackson Hole speech could setup a policy tweak that lasts well beyond his tenure (https://finance.yahoo.com/news/powells-jackson-hole-speech-could-setup-a-policy-tweak-that-lasts-well-beyond-his-tenure-174606260.html)

[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] Rate cut watch: All eyes on Fed Chair Powell's final Jackson Hole speech (https://finance.yahoo.com/news/rate-cut-watch-all-eyes-on-fed-chair-powells-final-jackson-hole-speech-100023617.html)

[4] Fed Chair Jerome Powell may seriously disappoint Wall Street (https://fortune.com/2025/08/17/jerome-powell-jackson-hole-speech-preview-fed-rate-cuts-tariffs-inflation-jobs/)

[5] US inflation supports September rate cut (https://www.ssga.com/us/en/institutional/insights/weekly-economic-perspectives-18-august-2025)

[6] Take Two: US inflation data drives markets higher (https://www.axa-im.com/investment-institute/market-views/market-updates/take-two-us-inflation-data-drives-markets-higher-eurozone-growth-slows)

[7] Trump wants the Fed to lower rates like the ECB but overlooks one or two or three important things (https://blog.rangvid.com/2025/08/17/trump-wants-the-fed-to-lower-rates-like-the-ecb-but-overlooks-one-or-two-or-three-important-things/)