Jerome Powell appeared Friday to open the door to the central bank’s first rate cut of President Donald Trump’s second term as the Federal Reserve chair indicated that current monetary policy may be restricting economic activity.
In a closely watched speech at the Fed’s annual symposium in Jackson Hole, Wyoming, Powell said the labor market was now in a “curious kind of balance” resulting from lowering hiring and decreasing availability of workers amid Trump’s immigration crackdown and demographic changes.
But overall, “downside risks to employment are rising,” Powell said. “And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
As a result, a change in the Fed’s current policy stance — in the form of lowering its benchmark interest rate — may be warranted, he said. By making it less expensive for consumers and businesses to take out loans, the Fed seeks to boost overall economic activity.
Stocks surged on the remarks as investors anticipated the Fed was now more likely to lower its key borrowing rate at its next meeting in September.
“Today’s speech could not be more clear that Powell is ready to cut rates on September 17th and the market is now fully priced for it and for a 2nd one by year end,” Peter Boockvar, an independent economist and market strategist wrote in a note following Powell’s speech.
Trump has spent months lobbying for a rate cut, arguing they had yet to spark significant inflation. Powell addressed that, too, on Friday, saying the impact of tariffs on consumer prices “are now clearly visible” and that they expect continued effects “over coming months.” But he said there remained “high uncertainty about timing and amounts.”
The speech comes as the central bank faces both internal divisions about the future direction of monetary policy while it responds to a shifting economic landscape and unprecedented outside pressure as key Fed officials face attacks from the Trump administration.
Some Fed members believe that any inflation caused by President Donald Trump’s tariffs will prove short-lived and that rates should be lowered to counteract signs of a deteriorating labor market, according to minutes from the most recent Fed meeting. Reducing the cost of borrowing for businesses and consumers tends to spur economic activity and thus hiring.
Other Fed members said that it was too soon to know how long the price increases from the tariffs will persist and that despite some signs of weakening, the jobs market is in no imminent danger. These officials would prefer to keep interest rates closer to current levels.
Economic analysts say conflicting economic data have set the stage for the differing views. While layoffs and the unemployment rate remain relatively low, hiring rates have also stalled. Meanwhile, recent inflation reports show mixed effects on prices for goods affected by tariffs — but that price growth for many consumer services remains elevated.
“Core inflation is still stubborn and the labor market, while showing some signs of cooling, isn’t screaming for emergency intervention,” Kevin Ford, strategist at Convera financial group, wrote in a note to clients. “This disconnect is what makes Powell’s speech a high-stakes event.”
Trump continues to hammer Powell on social media, calling on him to lower rates to boost the economy and, in particular, to boost home buying. But since the Fed’s benchmark interest rate does not affect mortgage rates, many experts believe the home market will continue to drift sideways no matter what the Fed does. It would likely take a significant economic downturn to materially lower the 30-year mortgage rate, experts say.
This week, Trump administration officials opened up a new front against Fed personnel, accusing Lisa Cook, who holds a governor position at the central bank, of committing mortgage fraud. The charge is being led by Bill Pulte, head of the Federal Housing Finance Agency, who posted images that suggested Cook claimed two different homes as her primary residence, but did not provide further evidence. Trump subsequently called on her to resign. Pulte continued his attack Friday, posting another image that he said suggested discrepancies in Cook’s mortgage documents, though these could not be verified. Trump subsequently posted again that Cook must resign or he would fire her.
Cook, who was nominated by President Joe Biden, said in a statement that she would take any questions about her financial history “seriously as a member of the Federal Reserve” and was “gathering the accurate information to answer any legitimate questions and provide the facts.”
Trump is already set to increase his influence on the Fed directly after he nominated his economic adviser, Stephen Miran, to replace Fed governor Adriana Kugler, who recently announced her resignation.
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