Jerome Powell has reason to hedge in annual Jackson Hole speech as economic data zigzags

Jerome Powell has the ideal platform Friday to deliver a clear signal the Federal Reserve is about to resume cutting interest rates. But the economy isn’t giving him an equally clear signal that now is the time.

The Fed chair’s annual speech in Jackson Hole, Wyo., can be an opportunity to flag policy shifts. Powell used it for that purpose last year, and delivered a big cut soon after. He’s under intense pressure from President Donald Trump for a repeat performance.

Trouble is, the key economic indicators aren’t all pointing that way. A couple of weeks ago, when the latest jobs report revealed a slump in hiring, the case for lower rates appeared all but closed. Then came the sharpest spike in U.S. wholesale prices in three years — fuel for the concern about tariff-led inflation that’s kept Fed officials on hold so far this year.

All of this adds to the already-intense scrutiny on Jackson Hole.

Powell last month described the labor market as solid, and policy as well-positioned. Investors will listen keenly for even a tiny shift on either front — which could open the door to a cut at the Fed’s next meeting on Sept. 16-17. But with more economic numbers due before then, the Fed chief may prefer to keep his messaging carefully hedged.

“Even though I expect him to generally point to lower rates at the next meeting, I do expect him to precondition it on a very data-dependent message,” said Jonathan Pingle, chief U.S. economist at UBS Securities. “I don’t think he’s going to lock it in.”

Bond markets have been tempted to think it’s already a lock.

Two-year Treasury yields, the most sensitive to Fed policy, plunged this month as traders swung toward pricing in a quarter-point cut in September. Those bets took off after the unexpectedly bad July employment report, which also revised payrolls for the prior months downward. And they’ve only been dialed back slightly in the light of last week’s nasty inflation surprise.

Bond investors are waiting to see if Powell affirms this market pricing — or pushes back with a reminder that new data arriving before the next policy gathering could change the picture. They’re also looking for clues about the longer-run trajectory of Fed cuts into next year.

“Part of the strategic debate is whether to start early and go slow, or start later and be more aggressive,” said Ed Al-Hussainy, rates strategist at Columbia Threadneedle Investment.

While that’s where the market focus will be, in terms of word count, the path ahead for interest rates may take up only a small portion of Powell’s Jackson Hole address.

It’ll be the last speech he delivers to the annual symposium before his term as chair expires next May — and the backdrop is one of the most turbulent periods in recent Fed history. Trump has lambasted Powell’s leadership and flirted with the idea of firing him, in what looks to many Fed-watchers like an ominous assault on the central bank’s independence.

In addition to slamming the Fed’s reluctance to cut rates this year, Trump and his allies have highlighted its failure to keep a lid on the inflation surge that followed the pandemic. That’s related to another issue Powell will touch on in Jackson Hole: The ongoing review of the central bank’s framework for setting policy, which is expected to draw on lessons learned during the COVID era.

Taken altogether, the speech could have a valedictory tone. “There’s a reason former chairs have used their last Jackson Hole speeches to reflect on their tenure,” said Pingle. “It’s their opportunity to write their history.”

Most recently, Powell and most of his colleagues have adopted a wait-and-see approach to monetary policy. Their concern is that the U.S. could have a persistent inflation problem, after Trump hiked import tariffs to the highest levels in a century.

So far, this hasn’t resulted in the much-feared spike in consumer prices. Still, underlying inflation accelerated in July — and so did producer prices, which businesses often pass on to their customers with a lag.

Meanwhile, inside the Fed, consensus on a patient approach to policy has broken down — largely thanks to the weakening labor market. Fed governors Christopher Waller and Michelle Bowman, two Trump appointees, dissented against the July decision to hold rates steady, backing a cut instead.

Trump has highlighted those dissenting votes to escalate his campaign for lower rates. The president has said the Fed should cut its benchmark — which has been in a range of 4.25% to 4.5% all year — by as much as 4 percentage points.

Treasury Secretary Scott Bessent also chipped in last week, citing the case for a 50-basis-point cut in September. That’s what the Fed delivered in the same month last year, after a weak jobs report prompted Powell to emphasize labor-market risks from the Jackson Hole podium.

Things are different now, with tariffs looming. San Francisco Fed president Mary Daly, who believes it will likely be appropriate to cut twice this year, rejected the notion that a large cut was needed next month, saying it would signal unwarranted urgency.

Still, there’s a sense that U.S. central bankers are more divided over the economic outlook than they’ve been in the recent past — another reason for Powell to avoid giving a clear steer this week.

He may be on safer ground when it comes to the so-called framework review that Fed officials have undertaken this year. Powell is expected to offer insight into the latest thinking about this important guide to longer-run policy.

The current version dates to 2020, when the Fed made two key tweaks.

One was to allow inflation to overshoot the 2% target for a while, if it had persistently fallen short of that number. The second was effectively to ditch the idea that a too-hot job market should automatically trigger interest rate hikes to ward off inflation, even if the actual price pressures hadn’t yet shown up.

These dovish-leaning changes were influenced by the U.S. economy’s anemic recovery after the 2008 crash. Back then, with inflation subdued and unemployment stubbornly high, it looked like the chief threat to the Fed’s employment and inflation goals came from an underheated economy. And when joblessness finally fell to low levels, it never generated much inflation. In economist parlance, the risks were asymmetric.

Unfortunately for the Fed, these tweaks to the framework took effect just before the pandemic unleashed the worst U.S. inflation in four decades. Critics inside and outside the central bank have argued the new framework was ill-suited to tackling the pandemic price surge, and contributed to the Fed’s delayed response.

Powell has indicated both these components of the framework could now be on the chopping block, and that the new one will be applicable to a wider range of economic conditions. Fed-watchers may get more details at Jackson Hole.

The COVID aftermath was “a sharp reminder that we can have overheated labor markets. We can have well above-target inflation,” said Michael Pugliese, senior economist at Wells Fargo. “I think there’ll be an effort to link those lessons learned to today, where it does seem as if the risks around the dual mandate are once again sort of symmetrically balanced.”