When Jerome Powell took the stage at the 2024 Jackson Hole economic policy summit, he signalled that rate cuts were on their way. This year, it may not be so simple.
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The Federal Reserve Chair faces pressure on all fronts. On one side, the recent jobs report that revealed a slump in hiring, fueling calls for a cut. On the other, a sharp spike in wholesale prices, fueling fresh concern about tariff-led inflation.
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Then there is President Donald Trump, who has called him a “major loser” and a “total stiff” for not cutting rates, and has floated the idea of trying to fire the central bank chief on several occasions.
Powell may be cornered, but Wall Street will still listen intently for clues as to which way he is leaning. Here are three possible outcomes.
Signals for a rate cut
At the Fed’s July policy meeting, Powell described the labor market as “solid.” Since then, jobs data suggested it is anything but. The U.S. created just 73,000 new jobs in July, far less than the 110,000 economists expected, while the figures for May and June were slashed by 258,000 combined.
Several Fed officials have since pointed to the data as evidence of a slowing economy, suggesting that a cut is imminent. Markets agree. CME Group’s FedWatch tool indicates that traders were pricing in an 83% chance of a cut as of Tuesday morning.
“With the labor market already near the limit of what could be called maximum employment, we suspect that weak job growth and concern about further downward revisions and downside risks have already convinced the Fed leadership to resume rate cuts,” wrote David Mericle, chief U.S. economist at Goldman Sachs.
Short of simply stating that he sees it as appropriate to cut rates, markets will look out for changes of tone on jobs data, or references to an economic slowdown to cement their hopes of a cut.
Dashing market hopes
Powell could well lean more heavily on last week’s hotter-than-expected inflation data, however. The latest Producer Price Index showed a 0.9% climb in July compared with the previous month — triple the pace economists expected — and pushed the annual wholesale inflation rate up to 3.3%.
The data sent markets lower last week on concerns that a rate cut may be less likely. Chris Zaccarelli, chief investment officer at Northlight Asset Management, wrote that it was “a most unwelcome surprise to the upside and is likely to unwind some of the optimism of a ‘guaranteed’ rate cut next month.”
What’s more, Trump’s tariffs are increasingly in the mix. Tariff-exposed categories such as machinery and certain food products showed the sharpest rises. Zaccarelli added that the figures show inflation is “coursing through the economy, even if it hasn’t been felt by consumers yet.”
That could be too much for Powell to commit to a rate cut, said Barclays in a recent note, adding that markets are “excessively confident” about a September move.
Powell’s July press conference described policy as “only modestly restrictive” and emphasized the need to keep inflation expectations anchored, it added. “A reiteration of Powell’s earlier comments would likely reduce expectations of a September cut.”
Sitting on the fence
Perhaps the most likely outcome, given the circumstances, is that Powell adopts a wait-and-see approach. After all, another jobs report and more inflation data are due before the Fed’s Sept. 18 meeting.
“If Chair Powell carves out part of the speech with an update on the outlook for policy, we expect he remains data dependent,” economists at UBS wrote. “We doubt he commits to a September rate cut specifically.”
Jeremy Siegel, a senior economist at WisdomTree, wrote that even this could be taken as a sign that he is leaning against a cut.
“If he stresses the need for more data and downplays recent softness, markets will take it as a hawkish signal, and I expect risk markets to react negatively,” he said in a recent note. But either way, he added, the speech “will be the fulcrum on which the next leg of this market pivots.”