Investing.com - Federal Reserve Chairman Jerome Powell indicated on Friday that a rate cut may come next month, balancing concerns about a slowing labor market and ongoing inflation risks.
During his speech at the annual Jackson Hole Federal Reserve conference, Powell confirmed that no decision has been made yet but stated that "the changing balance of risks may call for an adjustment to our monetary policy stance." His remarks carried less certainty than last year's signal for upcoming cuts, but investors quickly raised their bets for a move in September.
"Federal Reserve Chairman Powell's comments at Jackson Hole were more dovish than we expected, both from ourselves and the markets," wrote Aditya Bhavi, an economist at Bank of America, in a note.
Futures markets are now fully pricing in a quarter-point cut at the September 16-17 meeting, with many Wall Street analysts revising their forecasts to expect two cuts totaling half a percentage point before the end of the year. The federal funds rate currently stands at 4.25%-4.50%.
"The stability of the unemployment rate and other labor market measures allows us to move forward cautiously," Powell told economists and international policymakers.
But he warned that "downside risks to employment are rising" as both supply and demand for labor slow, cautioning that job losses could escalate quickly if conditions deteriorate.
Regarding inflation, Powell stated that tariffs are expected to drive prices up, but he described the impact as likely temporary. However, he added that tariffs "could spur more persistent inflation dynamics," which is a risk that must be "assessed and managed."
"It is clear that Powell was disturbed by the downward revisions to the payrolls, as there have been no major easing developments since his hawkish press conference in July," added Bhavi.
Overall, Powell's comments placed additional focus on the upcoming jobs report scheduled for September 5. Meanwhile, Powell's recent remarks are likely to support risk assets.
U.S. stocks rose on Friday, with the Dow Jones Industrial Average adding 846 points, or 1.89%, to close at a record 45,631.74.
The S&P 500 rose by 1.52% to close at 6,466.91, near its all-time high, while the Nasdaq Composite increased by 1.88% to 21,496.53.
Barclays (LON:BARC) now expects two rate cuts this year.
Powell indicates a bias towards easing, with the priority on full employment risks now weighing on the central bank's policy adjustments, according to Mark Gianoni, an American economist at Barclays.
Gianoni says Powell's comments at Jackson Hole suggest that the Federal Reserve is leaning towards preemptive cuts in September, a view likely to be supported by moderate members of the Federal Open Market Committee.
"We believe that the moderate voting bloc on the board is likely to agree with his assessment, which should be enough to carry the Federal Open Market Committee's vote," he wrote.
However, Powell also emphasized that stability in unemployment allows the Federal Reserve to move cautiously, meaning that cuts would come in 25 basis point steps at quarterly intervals.
As a result, Barclays revised its interest rate forecasts, now expecting two cuts of 25 basis points this year, in September and December, followed by another two cuts in March and June 2026.
"Although the threshold for not cutting is high, we believe the paths for holding in September remain intact and that consecutive or large cuts are unlikely," wrote Gianoni.
The bank revised its previous forecast for September 2026 to this year. By late 2026, Barclays expects the federal funds rate to be maintained at 3.25%-3.50%, slightly above the estimated neutral range of 3.00%-3.25%.
Barclays also stated that a strong jobs report in August could keep the Federal Reserve on hold. A drop in the unemployment rate to 4.0%-4.1% alongside core inflation holding steady at no less than 0.4% could provide the threshold for no action in September.
For Bhavi at Bank of America, an employment rate of 4.2% in August, with job growth of 70,000+ and minimal negative/positive revisions, could keep rates steady.
This article is translated with the help of artificial intelligence and has been reviewed by an editor. For more details, please refer to our terms and conditions.
