Powell suggests Fed could cut rates soon as Trump policies shake economy

Federal Reserve Chair Jerome Powell said Friday the central bank faces “significant uncertainty” as it attempts to navigate the impact of President Trump’s policies, suggesting the bank could cut rates as the job market weakens.

In remarks at the Fed’s annual summit in Jackson Hole, Wyo., Powell said the Fed needs to determine whether the impact of Trump’s tariffs, immigration restrictions and tax cuts will be temporary, or lead to permanent changes in the U.S. economy.

Even so, Powell said, the weakening of the U.S. labor market could push the Fed to slash interest rates at a point to be determined.

“There is significant uncertainty about where all of these polices will eventually settle and what their lasting effects on the economy will be,” Powell said.

The Fed, Powell said, is facing two conflicting trends: rising inflation, which would call for higher rates, and a weakening labor market, which would lend support for cuts.

“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside — a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate,” Powell said.

Powell said that while the impact of Trump’s tariffs are “clearly visible,” it is not yet clear if they will lead to a one-time increase in prices or trigger a longer-term inflation surge.

“We expect those effects to accumulate over coming months, with high uncertainty about timing and amounts,” Powell said.

Futures markets interpreted Powell’s speech as making an interest rate cut more likely in September. The CME FedWatch algorithm increased to 89.2 percent chance of a cut next month, from 75 percent before the speech.

The stock market, which tends to benefit from interest rate cuts, also rallied on the news

The Dow Jones Industrial Average was up 785 points shortly after 10:30 a.m. EDT, rising 1.8 percent on the morning. The S&P 500 index was up 1.5 percent, and the Nasdaq was up 1.8 percent.

Treasury yields also responded positively to Powell’s speech, with the 10-year dropping from 4.31 percent to 4.26 percent before inching slightly higher.

“Powell’s speech was definitely a market-mover,” Bankrate analyst Ted Rossman said in a commentary. “Stocks have rocketed higher and bond yields are down as the door seems wide open for a September rate cut.”

Following a dismal July jobs report that showed the economy adding only 35,000 jobs per month since May, economists have been parsing labor data to discern whether it’s demand for workers that has sapped job growth or a lower labor supply, which could be a result of Trump’s immigration crackdown.

The unemployment rate has stayed low at 4.2 percent, showing the falloff in hiring did not put a lot of people out of work or add slack to the labor market. This suggested to many economists that the downturn was more related to falling labor supply, which is less of an indicator of general economic slowdown.

But on Friday Powell said it was both decreased supply and demand that’s weighing on employment.

“While the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers,” he said. “This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly.”

Powell’s final Jackson Hole speech as Fed chief comes as the central bank faces enormous pressure from Trump to deeply slash interest rates.

Trump has raged against the Fed and Powell, specifically, for holding rates steady through the year after cutting them twice under former President Biden. While the Fed had anticipated cutting rates this year, Powell and other Fed officials blamed the delay on Trump’s steep tariffs.

Powell has defended the Fed’s decisions to keep rates steady as the banks waits to see how Trump’s tariffs will affect the economy — whether by boosting prices temporarily, causing a long-term increase in inflation, slowing growth or having little overall impact.

Inflation has also crept higher over the summer as the full weight of Trump’s tariff regime takes effect and ripples through the economy.

Even so, Powell has faced increasing opposition from within the Federal Open Market Committee (FOMC) — the panel of Fed officials responsible for setting rates — as the summer has worn on and Trump gets closer to choosing his successor.

Fed board of governors member Christopher Waller and Vice Chair of Supervision Michelle Bowman both voted against the FOMC’s decision to keep rates steady last month, calling instead for a 0.25 percentage point rate cut.

Waller and Bowman, both Trump appointees, are in the running to succeed Powell as chair when the latter’s term expires next year.

Both have been more sympathetic to Trump’s calls for rate cuts, but they have not come close to supporting the crisis-level reductions the president is seeking.

While markets liked the speech, a rate cut is not guaranteed. There will be another consumer price index report prior to the Fed’s next rate-setting meeting.

Powell said last year that the era of near-zero interest rates, which was the norm before the pandemic, could be over, and his Friday remarks suggested that this could still be the case, despite the clamoring of the White House for ever lower rates.

Real interest rates, which are interest rates minus the inflation rate, could be higher for the foreseeable future due to increases in productivity and lower tax rates, such as the one Republicans just passed in Congress.

“[The] neutral level may now be higher than during the 2010s, reflecting changes in productivity, demographics, fiscal policy, and other factors that affect the balance between saving and investment,” Powell said.

Updated at 11:20 a.m. EDT.