Careful Approach to Interest Rates
Federal Reserve Chairman Jerome Powell on Friday indicated the central bank might cut its benchmark interest rate in the next few months but refused to provide a specific timeline, emphasizing prudence as policymakers balance the impact of tariffs, inflation, and a slowing labor market.
At a highly anticipated address at the Fed’s annual economic conference in Jackson Hole, Wyoming, Powell recognized increasing dangers of both soaring joblessness and persistently elevated prices. “The evolving balance of risks might be cause to change our stance in policy,” he stated, in his most straightforward signal so far that a cut in interest rates is in consideration.
Markets responded quickly to his remarks, with the S&P 500 rising 1.5% in midday trading. Goldman Sachs economists forecasted a quarter-point reduction at the Fed’s upcoming meeting on September 16-17. The federal funds rate is 4.3%.
Nevertheless, Powell emphasized that the Fed would move cautiously, highlighting that future moves would depend on new economic information. “The stability of the unemployment rate and other labor market measures allows us to proceed cautiously as we ponder shifts in our policy course,” he explained.
The chair of the Fed pointed to tariffs as a major force behind recent price growth. Consumer prices rose 2.7% in July compared to a year ago, and core inflation, which doesn’t include food and energy, was 3.1%, both above the Fed’s 2% goal.
Powell added that tariffs are already manifest in retail prices for products such as furniture, toys, and footwear. Although he predicted these price increases could be a “one-time shift” but not persistent inflation, he emphasized that the Fed would prevent them from spiraling. “Come what may, we will not let a one-time increase in the price level become a persistent inflation issue,” he said.
His comments indicate that, while a small reduction to offset jobs is conceivable, the sharp reductions the White House demands are unlikely.
Political Flashes with the White House
Powell’s speech has been subject to intense political examination, especially by President Donald Trump, who has been constantly urging the Fed to cut rates. Trump believes that reducing rates would reduce the cost of borrowing for the government and rekindle the downturned housing market.
The president raised the stakes on Friday, informing reporters that he would proceed with removing Federal Reserve Governor Lisa Cook over unsubstantiated charges of mortgage fraud, a step that would enable him to install a loyalist on the Fed board. Although the president cannot remove Fed officials due to disagreements over policy, he can terminate them “for cause,” typically construed as misconduct.
Later in the day, Trump directly attacked Powell, labeling him “too late” on rate cuts. Powell, in return, reaffirmed the independence of the Fed, stating that officials will make decisions strictly based on economic data, “never deviating” from such a principle.
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Fed Reviews Its Framework
Powell also used his Jackson Hole appearance to unveil revisions to the Fed’s policy framework, first introduced in 2020. That framework allowed inflation to temporarily overshoot the 2% target and directed the Fed to focus on employment “shortfalls” rather than deviations. Critics argue those rules delayed the Fed’s response when inflation surged to four-decade highs in 2022.
The new strategy, Powell said, is crafted to better fit a broader spectrum of economic conditions. “A key aim has been to ensure that our framework is appropriate over a broad spectrum of economic conditions,” he said.
Even as hiring slows, Powell noted that unemployment is still fairly low. Yet with immigration declining and employment growth moderating, he cautioned that the danger of more severe layoffs is increasing.
For the time being, the Fed has a fine balance to strike: lowering rates to support the labor market without kindling higher inflation. The coming September, October, and December policy meetings will challenge how adeptly the central bank can balance both.
