Fed's Powell faces dilemma as he crafts message on interest rate cuts at Jackson Hole

USA Today

11 hours ago

A year ago, when Federal Reserve Chair Jerome Powell delivered his keynote address at the central bank's annual conference in Jackson Hole, Wyoming, his message was straightforward and market-friendly.
Inflation was easing, job growth was slowing and the unemployment rate was rising at a pace that traditionally signals recession.
After hiking its key interest rate to a 23-year high to fight a pandemic-induced inflation spike, the Fed was finally poised to lower it, Powell said. Stocks surged.
At his Jackson Hole speech on Aug. 22, Powell faces a more formidable challenge as he looks to provide another signal about the Fed's September interest rate plans after yet another long pause aimed at ensuring consumer price increases have been tamed.
This time, however, the picture is far more muddled, and economists are split over whether Powell will telegraph a likely rate decrease next month or a continuation of the Fed's wait-and-see approach. Minutes of the Fed's July 29-30 meeting released Wednesday, Aug. 20, showed most officials regarded high inflation, not a weak job market, as the largest risk.
A rate cut likely would reduce a wide range of borrowing costs for millions of Americans, including for certain mortgages, credit cards and auto loans, but also trim bank savings rates that have gotten more generous the past few years.
Powell is also expected to announce a policy shift that could keep interest rates higher over the longer term as officials put more emphasis on keeping inflation contained.
How is the job market in the US right now?
Job growth has weakened substantially but, at 4.2%, the unemployment rate has been stable at a historically low level. And inflation has climbed higher in recent months, at least in part because of President Donald Trump's sweeping import tariffs.
Before cutting rates, Powell has said, officials want to ensure tariffs amount to a one-time bump to inflation and don't raise Americans' inflation expectations in ways that ripple through the economy.
How does the Fed decide the interest rate?
The Fed lowers rates to support a flagging economy and job market. It raises rates or keeps them higher for longer to cool the economy and wrestle down inflation. Officials slashed a key rate by a percentage point late last year but have been on hold since December as they assesses the impact of the import fees on prices.
Powell in July also said officials are focused on the unemployment rate, rather than job growth, as they weigh a rate decrease because reduced immigration – due mostly to Trump's policies – have lowered the number of payroll gains needed to keep the jobless rate low. Simply put, there are fewer people looking for jobs, so it's not such a bad thing that there are fewer jobs available.
While the unemployment rate meets the Fed's goal of 'maximum employment,' the Fed's preferred inflation measure, at just under 3%, is well above its 2% target, Powell noted. The implication: Officials are still in no hurry to lower rates.
That was all before the historically bad July jobs report came out early this month.
What was the July jobs report?
Employers added just 73,000 jobs and employment gains for May and June were revised down by a massive 258,000. Unemployment rose from 4.1% to a still-low 4.2%. The revisions, which left job growth averaging a measly 35,000 the past three months, have futures markets giving 81% odds of a September rate cut.
Does Powell stick to his cautious message and disappoint investors despite the feeble July employment report?
Or does he hint at a likely rate cut that may appear as though he's backtracking from his guidance about staying focused on inflation and unemployment rather than job gains?
'He is in a difficult spot,' said Jonathan Millar, senior U.S. economist at Barclays.
Another wrinkle: Trump has been badgering Powell and the Fed to cut rates, calling him a "moron," and "numbskull," among other derogatory epithets. Powell has said the Fed isn't influenced by politics. Powell hasn't been the only target of Trump's ire at the central bank. The president on Aug. 20 demanded Fed governor Lisa Cook resign following fraud accusations from his administration.
With the August inflation and jobs reports scheduled to be released before the Fed's mid-September meeting, providing officials a more complete picture, 'I don't think he's going to give a really strong signal' either way, said David Seif, chief economist for developed markets at Nomura.
Yet forecasters anticipate at least some clues. If Powell doesn't push back at market expectations for a September rate cut, investors will likely interpret it as tacit confirmation such a move is likely, Millar said.
Is inflation actually getting better?
Overall inflation held steady last month at 2.7% but a core measure that strips out volatile food and energy items and that the Fed watches more closely jumped from 2.9% to 3.1%, according to the consumer price index. The effects from tariffs were mixed. Some goods typically imported from China, such as furniture and video and audio products, rose sharply. Others, including apparel and toys, moved up more modestly.
Most economists viewed the report as relatively benign and a virtual all-clear signal for the Fed to chop rates in September. 'We don't see any real sign of tariff-induced inflation,' Seif said.
Millar, however, noted that a gauge of wholesale costs rose at the fastest pace in more than three years, auguring a further rise in consumer prices.
And Austan Goolsbee, president of the Federal Reserve Bank of Chicago and a voting members of the Fed's interest rate-setting committee, told reporters last week he's worried about big price increases in categories such as airfares and dental services that may reflect a more fundamental and persistent inflation rise. He also said he's not so concerned about low job growth figures because of population changes resulting from immigration policy changes. That's noteworthy because Goolsbee is considered a 'dovish' Fed official who often favors cutting rates to avoid recession rather than raising them to head off inflation.
Economists also disagree about the state of the job market.
Goldman Sachs is worried that hiring in healthcare, education and the public sector, which supported solid job gains for many months, has now faded. And many other private-sector employers have put plans to add employees on hold as they await the effects of Trump's tariffs.
Seif said the unemployment rate may be providing a deceptive signal of the labor market's health.
In July, the share of Americans working or looking for jobs fell to the lowest level since November 2022. Although layoffs are still low, hiring has slipped below prepandemic levels. The upshot: Many unemployed people and recent college graduates are getting discouraged and leaving the workforce, Seif said.
'You have the unemployment rate creeping up and a lot of people dropping out of the labor market,' Seif said. He expects the Fed to trim its key rate by a quarter percentage point next month to a range of 4% to 4.25%. 'Three months of 35,000 (average) job gains is pretty bad.'
But Millar said Trump's immigration crackdown could be skewing the labor force participation numbers. Many migrants are likely hesitant to answer questions from government officials conducting a jobs survey.
He expects Powell to signal a high bar for a September rate cut. 'A lot of the job market is consistent with full employment,' he said, citing the low unemployment rate.
What is the policy framework of the Federal Reserve?
Powell is also expected to announce a reversal of a 5-year-old policy shift that could keep interest rates somewhat higher over the long term.
In 2020, the economy had been growing slowly during the decade since the Great Recession of 2007-2009 and inflation remained stubbornly low. That's a potential problem because persistently low inflation can prompt consumers and businesses to expect it to continue, perpetuating a cycle of paltry price increases. That can lead to deflation, or falling prices, that may prompt consumers to put off purchases, hobbling the economy.
So instead of targeting 2% inflation, the Fed decided to aim for inflation that averages 2% over time. As a result, if inflation undershoots the Fed's target, officials would allow it to run 'moderately above 2% for some time," as Powell put it. The Fed also said its goal of 'maximum employment' would be determined by 'shortfalls" from that level rather than 'deviations.'
In other words, officials became less concerned about very low unemployment, believing it would be unlikely to spark high inflation and would help create more jobs for low-income and minority workers.
But the Fed's willingness to let inflation run hotter for longer may have contributed to the post-COVID-19 price surge. And with inflation and consumers' inflation expectations running higher than normal the past few years, Powell is expected to announce the Fed is returning to its previous policy of targeting 2% inflation and responding to 'deviations' from its goal of full employment, including an unemployment rate that's too low as well as too high.