Powell Jackson Hole Sends Cautious Rate Cut Signal S&P 500 Index Expands Gains

Federal Reserve Chairman Powell cautiously opened the door to a rate cut in September at the Jackson Hole symposium, pointing out that risks in the labor market are rising even though inflation concerns have not dissipated. Powell stated in his speech on Friday, "The stability of the unemployment rate and other labor market indicators allows us to be cautious when considering adjustments to our policy stance. However, the change in the outlook and risk balance may require us to adjust our policy while we are still in a tightening mode." After Powell's remarks, investors increased their bets on a rate cut at the Federal Open Market Committee (FOMC) meeting on September 16-17. Powell noted that the labor market is in a "delicate balance" with both labor supply and demand slowing significantly. He mentioned that July employment data showed that recent job growth was significantly weaker than previous statistics. "This unusual situation indicates that the risks to employment are rising. If these risks materialize, they could quickly lead to a surge in layoffs and an increase in the unemployment rate." At the same time, some officials continue to emphasize the resilience of employment, while others warn of potential weakness or the evolution of a more severe downward trend, reflecting internal disagreements within the Fed on the timing of policy adjustments. Powell also warned that the impact of tariffs imposed by the Trump administration on consumer prices is "clearly visible." While the expected impact may be temporary, if tariffs bring sustained upward pressure, it could lead to more persistent inflation risks. "When our goals are at odds, our framework requires us to balance the two ends of our dual mandate." Following the release of the speech, U.S. Treasury yields fell, the S&P 500 index expanded gains, and the U.S. dollar weakened. As of the time of writing, the Dow rose nearly 2%, the Nasdaq rose 2.11%, and the S&P 500 index rose 1.67%. Powell's speech comes amid unprecedented pressure from Trump and his allies to cut rates quickly, challenging the Fed's independence. During Powell's speech, Trump threatened to dismiss Federal Reserve Board member Koch if she does not resign. Previously, Koch was accused of providing false information when applying for a mortgage, but she has clearly refused to step down. Powell did not mention this issue in his speech. Powell also announced the latest modifications to the Fed's monetary policy framework. The Fed removed the phrasing "whereby shortfalls in employment relative to the Committee's assessments of its maximum level are" and replaced it with a more explicit statement that "the level of employment could be somewhat higher than the level that the Committee sees as consistent." This adjustment indicates a decreased tolerance for "overheated employment" from the Fed, but it retains the option of precautionary tightening depending on the actual circumstances. Powell stated, "If labor market conditions are tight or if other factors threaten the stability of inflation, a preemptive action may be warranted." Furthermore, Fed officials reiterated the 2% inflation target, abandoned the strategy introduced in 2020 of "allowing for inflation above target to offset previous shortfalls," and removed the wording describing low interest rates as "a defining characteristic of the economic landscape." Currently, Fed officials are clearly divided on the path of rate cuts. Cleveland Fed President Mester and Kansas City Fed President George have both expressed caution, while Atlanta Fed President Bostic expects only one rate cut this year. In contrast, San Francisco Fed President Daly and Minneapolis Fed President Kashkari have hinted at or supported a rate cut in September following weak employment data. At the end of last year, the Fed cut rates three times in a row, but has kept rates unchanged this year. Some officials are concerned that tariffs may lead to sustained inflation, and recent data showing the fastest wholesale price growth in three years in July supports this concern.