Powell at Jackson Hole: the Fed opens up to the possibility of rate cuts, but inflation remains a risk

The president of the Federal Reserve, Jerome Powell, delivered today his anticipated speech at the Jackson Hole economic symposium, suggesting that the American central bank might soon consider a cut in interest rates.

Powell described the current economic phase as a “curious equilibrium”: the labor market is cooling down, but remains close to full employment, with an unemployment rate at 4.2%.

The reduction in both labor supply and demand, he explained, could quickly turn into an increase in unemployment if conditions were to worsen.

On the inflation front, the president of the Fed highlighted the impact of recent tariffs, which have pushed the PCE index to 2.6% and the core PCE to 2.9%. Powell reiterated that the priority is to prevent these temporary price shocks from turning into persistent pressures or chain effects on wages.

The most anticipated point by the markets concerns interest rates. Powell stated that monetary policy is already in restrictive territory and that current conditions “might justify an adjustment.”

A phrase interpreted as an opening to a possible cut already in the September meeting, albeit with the utmost caution. He also reiterated the Fed’s independence, emphasizing that decisions will be made solely based on economic data, without political influences.

Review of the monetary policy framework

He emphasized that the Fed’s priority is to prevent these temporary effects from turning into persistent inflationary dynamics or chain wage increases. According to the most recent data, inflation has shown a gradual recovery, with consumer prices rising compared to previous months.

Regarding monetary policy, Powell acknowledged that interest rates are already in restrictive territory and that current conditions “could justify an adjustment.” A phrase that the markets interpreted as a signal of a possible cut as early as the next meeting, even though Powell clarified that every decision will remain guided exclusively by economic data.

Another central point was the review of the Fed’s monetary policy framework. Among the main innovations:

• the abandonment of the average inflation targeting strategy, deemed no longer adequate after the post-pandemic inflationary shocks;
  
• a clearer language on employment objectives, with the removal of the reference to “shortfalls,” which could generate ambiguity;
  
• the commitment to maintain the framework flexible and transparent, subject to periodic reviews.
  

In closing, Powell reiterated that the Fed will continue to move cautiously, balancing the need to contain inflation with that of supporting economic growth and employment. For the markets, the message is clear: the door to a rate cut is officially open, but the future trajectory will depend on incoming data.