As Federal Reserve officials gather in Jackson Hole, Wyoming, this week for their 43rd annual economic policy symposium, all eyes are on Chair Jerome Powell and his colleagues as they navigate a challenging dilemma: hold interest rates steady amid persistent inflation, or cut rates in response to recent soft labor market data.
Markets are currently pricing in a 25-basis-point rate cut in September, and President Trump has publicly pressed Powell to lower rates. Investors will scrutinize Powell’s Friday speech at 10 a.m. ET at Jackson Lake Lodge in Grand Teton National Park—the final Jackson Hole address of his tenure as Fed chair—for any signals about the Fed’s September move.
Inflation vs. Labor Market
Fed officials have closely monitored the impact of tariffs on prices, but recent Consumer Price Index and Producer Price Index readings suggest tariffs have had only mild effects, while services inflation unexpectedly accelerated in July. Because services account for the majority of the U.S. economy (goods represent just 11% of GDP), officials like Chicago Fed President Austan Goolsbee have flagged rising services inflation as a potential concern. Other policymakers—including Kansas City Fed President Jeff Schmid, Cleveland Fed President Beth Hammack, and Atlanta Fed President Raphael Bostic—remain focused on inflation risks.
At the same time, Bostic and others are noting the soft July jobs report, which showed just 73,000 new jobs added and downward revisions to prior months, bringing the three-month average to 35,000. A weakening labor market raises questions about whether the Fed should pivot to a more accommodative stance. Following the report, San Francisco Fed President Mary Daly and Minneapolis Fed President Neel Kashkari shifted from a “wait and see” stance to greater concern over employment, joining Fed governors Chris Waller and Michelle Bowman, who dissented at July’s meeting in favor of a 25-basis-point rate cut.
Powell’s Delicate Balance
After the July policy meeting, Powell emphasized that more time is needed to assess how tariffs may affect inflation and overall economic strength. He described the situation as “still quite early days” and noted that while inflation remains a concern, there is also downside risk to the labor market. He stressed that modestly restrictive policy remains appropriate but warned that the Fed must weigh emerging data carefully.
Markets remain convinced of a September rate cut, although odds have slightly eased following a hotter-than-expected wholesale price report. Capital Economics’ Paul Ashworth expects Powell to reinforce that a “modestly restrictive policy stance remains appropriate,” while Luke Tilley of Wilmington Trust suggests Powell may elaborate on how the Fed balances backward-looking data with forecasts in making policy decisions, particularly in weighing its dual mandate of price stability and maximum employment.
Policy Framework Review
In addition to signaling near-term rate intentions, Powell is expected to present the results of the Fed’s policy framework review at Jackson Hole. The review, conducted every five years, evaluates the central bank’s strategy, tools, and communication policies. The last framework, adopted in 2020, introduced a flexible average inflation target after inflation had run slightly below 2% in prior years. Given the recent surge in inflation and its potential impact on expectations and consumer sentiment, the Fed may modify aspects of that framework.
Deutsche Bank Chief U.S. Economist Matt Luzzetti notes that while the 2020 framework was not the main cause of the recent inflation overshoot, it contributed to the current policy environment. He expects Powell’s speech to restore a more preemptive approach to monetary policy, acknowledging supply shocks while maintaining a balanced view of inflation and employment.
Powell has previously indicated that the U.S. economy may face more volatile inflation and frequent supply shocks than in the 2010s. He has emphasized that the Fed may revisit its approach to achieving the 2% inflation target, refine its communications around forecasts and uncertainty, and potentially adjust the quarterly Summary of Economic Projections—including the widely watched “dot plot” showing each FOMC member’s rate expectations.
Investors will be closely watching the Jackson Hole speech for any guidance on how the Fed will navigate the competing pressures of inflation and a softening labor market, as well as potential changes to its policy framework that could shape monetary policy for years to come.
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