Powell Signals Possible September Rate Cut Amid Labor Risks And Inflation Concerns

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Federal Reserve Chair Jerome Powell suggested that the central bank may cut interest rates at its next policy meeting in September. Speaking at the Fed’s annual Jackson Hole Conference, Powell pointed to rising risks in the labor market and continued inflation pressures as key reasons for a possible policy shift.

Labor Market in a “Curious Balance”

Powell described the current job market as being in a unique state of balance. Both the demand for workers and the supply of labor are slowing down. Recent data showed weaker job growth, which raises the risk of layoffs and higher unemployment in the coming months.

He stressed that while the unemployment rate has remained stable, the downside risks for employment are becoming more visible. This situation, according to Powell, requires careful action from the Federal Reserve.

Inflation Concerns and Tariffs

On inflation, Powell warned about the effects of tariffs introduced under President Donald Trump’s administration. These measures have already increased consumer prices and could keep inflation pressures elevated if they persist longer than expected. However, Powell noted that the main effects may prove temporary over time.

He explained that the near-term risks are split: while inflation risks lean to the upside, employment risks tilt to the downside. This creates a difficult environment for monetary policy.

New Federal Reserve Policy Framework

Powell also announced that the Fed has adopted a new monetary policy framework.
This framework:

Takes a more balanced approach when inflation and employment goals conflict.
Removes the earlier idea of “averaging” inflation to 2% over time.
Eliminates confusing references about the zero-lower-bound limits.
Focuses on keeping long-term inflation expectations firmly anchored.

The change signals that the Fed will act more flexibly depending on economic conditions, rather
than waiting for specific triggers.

Market Reaction and Expectations

Financial markets responded immediately. Treasury yields fell, the S&P 500 strengthened, and the US dollar weakened. Traders now see a 90% chance of a September rate cut, up from 75% before Powell’s speech.

Powell’s remarks came amid political pressure from the White House to lower interest rates.
His comments received strong applause at Jackson Hole, underlining both the importance and the challenges of maintaining Federal Reserve independence.

Fed Rate Cut Expectations Shift

Update: August 25, 2025

Barclays now expects the U.S. Federal Reserve to cut interest rates twice this year—by 25 basis points each in September and December. Earlier, the bank had projected only one cut in December.

BNP Paribas has also changed its outlook, forecasting two rate cuts of 25 basis points each in September and December. Previously, it had expected the Fed to keep rates unchanged throughout 2025.