Economic conditions in the job market and inflation indicators, as perstood by Federal Reserve Chair Jerome Powell, may pave the way for a possible reduction in interest rates.

Fed Chair Jerome Powell Signals Shift in U.S. Economic Outlook

Federal Reserve Chair Jerome Powell delivered a speech at the Jackson Hole symposium, signaling a potential change in the U.S. economic outlook. In his speech, Powell acknowledged that downside risks to the labor market are rising and the balance of risks appears to be shifting.

Powell discussed the impact of tariffs on inflation, stating that they have begun to push consumer prices higher and the effects are expected to accumulate over coming months. However, he noted that the risk of a wage-price spiral, where workers request and receive higher wages to offset the impact of higher prices on household budgets, appears low.

Inflation expectations over the longer-term have remained "well-anchored and consistent with our longer-run inflation objective of 2%." Despite this, the probability of a 50-basis-point cut remained at zero, according to Powell. However, the odds of a 25-basis-point cut trended higher following Powell's speech, rising from 75% yesterday to 89.2%.

Economic growth slowed in the first half of the year due to slower consumer spending, Powell said. The Federal Reserve chairman expects the labor market to remain durable, with the unemployment rate and other labor market measures allowing the Federal Reserve to proceed carefully as they consider changes to their policy stance.

Seema Shah, chief global strategist at Principal Asset Management, stated that while Powell's speech "clearly leaned dovish," a 50-basis-point cut is not justified. Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, agreed, stating that the debate about how far and fast the Fed will cut rates is just beginning.

The Federal Reserve has room to maneuver as it brings rates back to a neutral level, according to Powell. The risk of a more lasting inflation dynamic due to tariffs is a risk to be assessed and managed, he said.

In other news, the discussion about Powell's successor as Federal Reserve Chair is ongoing. US Treasury Secretary Scott Bessent plans to present three or four candidates to the President soon, focusing on individuals experienced in monetary policy and regulation. Among potential candidates, Christopher Waller, a current FOMC member appointed by Trump who has shown openness to rate cuts, is considered a favored contender. However, the final decision on Powell's successor is expected only by the end of the year.

In response to Powell's speech, the stock market rallied, with major indexes up over 1% as expectations for a September interest rate cut rose. The odds of rates staying at the current range of 4.25% to 4.5% fell from 25% yesterday to 10.8% after the speech.

In conclusion, Powell's speech at the Jackson Hole symposium signaled a potential change in the U.S. economic outlook, with the balance of risks shifting and the Fed considering a possible interest rate cut in September. The debate about how far and fast the Fed will cut rates is just beginning, and the discussion about Powell's successor as Federal Reserve Chair is ongoing.