In his annual speech from Jackson Hole, Montana, on Friday, August 22, Federal Reserve Chair Jerome Powell delivered a more-than-4,000-word speech about the economy and the Fed’s plans for moving forward.
There’s the expert take, the pressures on the Fed, and Powell’s words, which show less certainty and raise questions about what might happen with tariffs and inflation.
What The Experts Are Saying
A number of commentators pointed to how Powell was “dovish.” In monetary theory, that means more likely to endorse more accommodating actions like lower interest rates that make it easier for companies to borrow money. Oxford Economics called it opening a door for a September rate cut, something the firm didn’t think would happen until December.
“Powell did something that no one thought he would – he went ahead and signaled that the Fed is ready to cut interest rates at their next meeting,” wrote Chris Zaccarelli, chief investment officer for Northlight Asset Management, in an emailed note. “As usual, he didn’t say it directly, and he gave himself an out in case the data goes the wrong way before September 17th, but the bar is extremely high now for the Fed to leave rates unchanged in less than a month.”
Oxford also said that the Fed likely thinks the actions are more normalizing than being accommodative, suggesting that a September cut isn’t likely to be the first of a series.
Administration Pressures On The Fed
Any move for the central bank is a challenge because of the pressure President Donald Trump has directed toward Powell and the Fed. Trump has made threats about removing the chair — including pointing to budgetary spending by the agency on building restoration as a reason for the action — although he has highly restricted abilities to replace him, given the way Congress originally designed the agency and position. Trump eventually said that he wasn’t looking to remove Powell.
Recently, Federal Housing Finance Agency Director Bill Pulte publicly suggested that Fed Governor Lisa Cook had potentially committed mortgage fraud — a virtually unheard of step without a completed investigation and referral to prosecution. And then Trump called on Cook to resign. It seems a clear attempt to undercut Fed leadership and open opportunities for the president to stack the deck and influence rate decisions.
All The Known Unknowns
What helped set up this move was the slowing labor market and massive downward revisions for July. Revisions to May and June numbers saw 258,000 fewer positions than had previously been reported. There are also continuing concerns about the effects of tariffs on inflation.
By the beginning of August, there were already some signs among large companies that tariffs were having a significant and quantifiable effect on corporate earnings. Some consumer prices increased at higher rates than average in July and the Producer Price Index, the corporate inflation equivalent of the Consumer Price Index, jumped 0.9% month-over-month. Are these the first steps to higher inflation? No one knows yet.
The two points are potentially early signs of trouble for the Fed and its dual mandates of price stability and maximum employment. The two have traditionally required polar opposite monetary responses. The Fed has usually dealt with one or the other except for times of stagflation, when unemployment and inflation both climb — the very condition that a number of economists, officials, and businesspeople have worried could come again.
Unfortunately, whether it will or not will take time to learn.