Powell sends strongest signal yet that interest rate cuts are coming

JACKSON, Wyo. - Jerome Powell, the chair of the Federal Reserve, on Friday used a closely watched speech to send his strongest signal yet that the central bank is preparing to soon restart interest rate cuts, highlighting the labor market's vulnerabilities even as inflation accelerates.

Powell held back from explicitly endorsing a reduction in borrowing costs at the Fed's next meeting in September. But his emphasis on the prospects of a weakening economic backdrop made clear that a cut is likely next month.

"The balance of risks appears to be shifting," Powell said in his final speech as Fed chair at an annual conference hosted by the Reserve Bank of Kansas City in Jackson, Wyoming. With borrowing costs weighing on the economy, the labor market softening and inflation risks contained, "the shifting balance of risks may warrant adjusting our policy stance," said the chair.

Powell highlighted the recent slowdown in monthly jobs growth, but questioned whether it was a function of a pullback in demand from companies or a reduction in the supply of workers resulting from President Donald Trump's immigration crackdown. He said that left the labor market in a "curious kind of balance" that warranted caution.

"This unusual situation suggests that downside risks to employment are rising," he said. "And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment."

Powell stressed, however, that inflation was still too high even as he sought to push back on concerns that Trump's tariffs would lead to a persistent rise in price pressures. Rather he said a "reasonable base case is that the effects will be relatively short-lived - a one-time shift in the price level."

"Of course, ‘one-time' does not mean ‘all at once.' It will continue to take time for tariff increases to work their way through supply chains and distribution networks," he added.

Still, Powell acknowledged that the Fed was in a "challenging situation" given that the central bank's two goals of low, stable inflation and a healthy labor market are now in tension with one another. Against this backdrop, he said, the Fed would need to "proceed carefully" with its plans to reduce the degree of restraint it is imposing on the economy.

That suggests that once the Fed starts cutting, it will not reduce interest rates quickly or by much if the economy evolves as expected. Powell reiterated Friday that he viewed the central bank's policy settings as only "modestly" restrictive, meaning there is not too far to go in terms of interest rate reductions before hitting the Fed's desired level. The central bank is aiming for a "neutral" setting that neither revs up the economy nor slows it down.

Stocks and bonds reacted sharply to Powell's remarks. The S&P 500 rose sharply, settling through the afternoon to a gain of 1.5% for the day. The tech-heavy Nasdaq Composite, with lots of high-growth companies sensitive to changes in interest rates, rose 1.9%, while the Russell 2000 index of smaller companies that are closely tied to the outlook for the broader economy rose over 3%.

Investors' expectations of lower interest rates were reflected in lower government bond yields. The two-year Treasury yield, which moves inversely to its price, fell 0.1 percentage point to 3.69%, while bets on the Fed cutting interest rates at its next meeting, in September, rose.

Powell's speech is typically the top billing of the three-day gathering, which brings together central bankers from around the world, current and past government officials and academics. Powell was met with resounding applause and a standing ovation before he began speaking.

Despite the warm reception in the room, attacks by the president and his allies on the institution and its top officials have diverted attention away from the pressing economic issues that tend to dominate discussions at the conference.

The administration on Wednesday turned its focus to Lisa Cook, who has served as a member of the Board of Governors since 2022. As Powell was delivering his remarks Friday, Trump said he would fire Cook if she did not resign after Bill Pulte, the director of the Federal Housing Finance Agency, said his office had investigated her for falsifying bank documents before her tenure at the Fed to obtain favorable terms on a mortgage. Pulte said the FHFA had referred the matter to the Justice Department for a criminal inquiry, a representative of which said the case "requires further examination."

Cook has pushed back on the allegations and said she would not be "bullied to step down from my position."

The charge against Cook is the latest front in the president's conflict with the Fed, which stems from the central bank's unwillingness so far to lower interest rates as dramatically as Trump would like.

Since returning to the White House, the president has publicly berated Powell, threatened to fire him and this month raised the specter of allowing a "major lawsuit" against the chair to go forward, related to his handling of costly renovations at the central bank's headquarters in Washington.

The president wants borrowing costs that are 3 percentage points lower than the current range of 4.25% to 4.5%. The Fed has opted to keep interest rates steady so far this year after a series of reductions in the second half of 2024.

Officials justified their wait-and-see stance by citing the uncertainty surrounding Trump's economic policies and concerns that tariffs, immigration restrictions and other pillars of his plans would stoke inflation even as growth slowed. Policymakers have in recent weeks become more divided about the right time to provide some relief to borrowers.

Two Trump-appointed officials, Christopher Waller and Michelle Bowman, voted against the Fed's decision to hold interest rates steady last month, instead favoring a quarter-point reduction. That marked the first double dissent on monetary policy by officials of that stature since 1993. Waller is seen as a potential contender to replace Powell as chair when his term ends in May. Bowman was tapped by the president this year to be vice chair for supervision.

But in the wake of new data that showed the labor market had cooled more than was first reported this summer, more officials beyond Powell appear to be embracing the need to slowly dial back the amount of restraint being imposed on the economy even as they pledge to stay vigilant about inflation.

Also on Friday, Powell laid out new details about the Fed's overarching strategy for setting monetary policy, which is reviewed every five years. The changes amount to a gutting of the 2020 version, which was rolled out at that year's Jackson Hole conference and marked a sea change in the way the central bank thought about its economic goals and how to achieve them.

"A key objective has been to make sure that our framework is suitable across a broad range of economic conditions," he said. "During this period, we saw that the inflation situation can change rapidly in the face of large shocks."

The 2020 framework established that the Fed would temporarily tolerate periods of higher inflation to make up for past stretches when it was too low, with an aim to average 2% over time. This "flexible average inflation targeting" approach was a direct response to the environment that the central bank found itself in after the global financial crisis, with inflation languishing below the Fed's target and interest rates close to zero.

Inflation started to take off on the heels of the new framework taking effect and eventually reached a four-decade peak in 2022, rendering the strategy inoperable.

Powell on Friday confirmed that the Fed would scrap what he described as the earlier "makeup strategy," adding that "the idea of an intentional, moderate inflation overshoot had proved irrelevant."

He also said the Fed would reverse course on a stipulation in 2020 that it would set monetary policy with an aim to address "shortfalls" of employment from its maximum level, rather than by "deviations." At the time, that meant it would not hasten to raise interest rates just because joblessness had fallen; it would need to see clear evidence that inflation was rising in a sustainable way.

As part of the overhaul, the Fed chair said the central bank had scrapped the "shortfalls" language because its use was "not intended as a commitment to permanently forswear preemption or to ignore labor market tightness."

This article originally appeared in The New York Times.