Federal Reserve Chairman Jerome Powell signaled that the door is wide open for a rate cut next month, though the deal isn't quite sealed. Rising downside employment risks "may warrant adjusting our policy stance" from its current restrictive setting," he said at his final annual speech in Jackson Hole, Wyo.
The S&P 500 rose moderately before turning on the gas after release of Powell's Jackson Hole speech transcript. Google parent Alphabet was among the early S&P 500 leaders, rising on its $10 billion deal to provide cloud services to Meta Platforms.
Ahead of Powell's speech, markets had still seen a good chance of a Fed rate cut on Sept. 17, but odds had come down substantially amid nervousness that he might take a hawkish posture. August employment and inflation reports likely won't be enough to derail a rate cut next month, but that possibility can't totally be ruled out.
10:49 a.m. ET
Fed Revisits FAIT-ful Decision
Powell also discussed the Fed's reassessment of its monetary policy framework that takes place every five years. In 2020, the Fed embraced flexible average inflation targeting, or FAIT. The Fed is kicking that approach to the curb. The idea was to balance periods of too-little inflation with periods of above-target inflation. But Powell said that no longer seems appropriate after a period of four years in which inflation has run hotter than the Fed's 2% target. The key word Wall Street was looking for was "preemptive." Previously, the Fed said it wouldn't try to get ahead of a potential rise in inflation because that could unduly weaken the labor market. That approach has been retired. "Preemptive action would likely be warranted if tightness in the labor market or other factors pose risks to price stability."
10:47 a.m. ET
Treasury Yields Tumble
The 10-year Treasury yield fell seven basis points to 4.26% from 4.33% on Thursday. The two-year yield, more closely tied to the Fed rate outlook, dived 10 basis points to 3.69%.
10:34 a.m. ET
Powell: Inflation Still On The Rise
"The effects of tariffs on consumer prices are now clearly visible," Powell said. He added that the Fed expects the effect of tariffs "to accumulate over coming months." Even if the Fed is willing to look through the likely one-time impact of tariffs on consumer prices, markets may face a gut check as hot inflation reports come in over the next couple of months.
10:33 a.m. ET
A 'Curious Kind Of Balance'
While the labor market "appears to be in balance," Powell called it "a curious kind of balance." He said it's "unusual" for both labor supply and labor demand to slow at the same time. The Fed's takeaway is that soft demand for workers poses further downside risk, raising the unemployment rate above the current 4.2% level. That's about the level the Fed sees as consistent with its full-employment mandate.
10:32 a.m. ET
Trump Threatens To Fire Fed Gov. Cook
On a separate note, President Donald Trump told reporters on Friday that he'll fire Federal Reserve Lisa Cook if she doesn't resign.
"What she did was bad, so I'll fire her if she doesn't resign."
The Justice Department reportedly has started a criminal investigation into allegations about Cook's mortgages. Cook has said she won't be "bullied."
The Supreme Court signaled earlier this year that the president may not have the authority to fire Fed governors without cause.
Trump is looking to significantly alter the makeup of the FOMC. He already has an open Fed governor seat to fill while Powell will exit as chairman next spring.
Stock Market Rallies To Highs On Powell. This Is The Next Big Test.
10:26 a.m. ET
Powell Notes 'Sharp Falloff In Immigration'
"Labor supply has softened in line with demand" for labor, Powell said. He noted that "the sharp falloff in immigration" has considerably slowed labor force growth. That means the "breakeven" rate of job creation needed to hold the unemployment rate steady is also "sharply" lower.
10:21 a.m. ET
Fed Rate Cut Odds See Jackson Hole Jump
Odds of a quarter-point rate cut on Sept. 17 jumped to 91% on Powell's Jackson Hole speech, up from around 71% before release of the transcript at 10 a.m. ET. Markets now see 85% odds of at least 50 basis points in rate cuts over the year's final three meetings. That's up from 72% earlier on Friday. However, markets still don't see 75 basis points in cuts as likely, with those odds rising to 37% from around 25%.
10:15 a.m. ET
Powell Isn't Too Worried About Trump Tariffs
Powell raised a few scenarios through which Trump tariffs could spur a reinforcing rise in inflation, not just a temporary one. But he proceeded to dismiss them as not particularly likely. That assessment is part of the Fed's baseline outlook that supports the case for starting to cut rates.
10:13 a.m. ET
Powell Asserts Fed Independence
Federal Open Market Committee (FOMC) "members will make these decisions, based solely on their assessment of the data and its implications for the economic outlook and the balance of risks. We will never deviate from that approach.
10:08 a.m. ET
Fed's Powell Signals Rate Cuts
"With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance," he said.
Reading between the lines, Powell may be saying that a September rate cut is very likely, but don't extrapolate. The Fed still sees the labor market as essentially balanced, so there may not be a need for significant rate cutting, especially not at a quick pace.
That probably reinforces the case for 50 basis points in rate cuts this year, not 75.
10:06 a.m. ET
Powell: Labor Market, Inflation Risks Now Balanced
Powell had said on July 30 that upside risks to inflation were greater than downside risks to the labor market. That balance seems to have changed with the July jobs report showing rising downside labor market risk.
10:04 a.m. ET
Stocks Jump
The S&P 500, up modestly before 10 a.m. ET, jumped 1.3% on the initial reaction to Powell headlines.
Fed Rate-Cut Odds Ahead Of Jackson Hole Speech
Following last week's July consumer price index report, markets had fully discounted a quarter-point rate cut at the Sept. 17 Fed meeting. But odds have pulled back from 100% on Aug. 13 to 71% on Friday morning, ahead of Powell's speech in Jackson Hole, according to CME Group's FedWatch tool.
Markets see 72% odds of at least 50 basis points in rate cuts over the year's final three Fed meetings, though that's down from 82% a week ago.
Powell's Labor Market Take
The monthly average payroll gain over the past three months is just 35,000. That follows shocking downward revisions to May and June payroll gains, which were slashed by a combined 258,000 to just 33,000.
So why won't Powell just go ahead and confirm that a cut is coming in what will be his final Jackson Hole speech as Fed chair? "The main number you have to look at now is the unemployment rate," Powell said on July 30.
Though job gains have tanked, the unemployment rate is so far holding steady at 4.2%.
"Because of immigration policy really, the flow into our labor forces is just a great deal slower," Powell said. As a result, what he called "the break-even number" — the number of new jobs needed each month to keep up with growth of the workforce and keep the unemployment rate from rising — has come down too.
Matthew Luzzetti, chief U.S. economist at Deutsche Bank, wrote that "after accounting for deportations, the break-even monthly jobs number could be 50k or a little lower." He added that Chicago Fed President Austan Goolsbee has said much the same.
Yet even if the unemployment rate is steady at 4.2%, a level deemed roughly consistent with the Fed's full-employment mandate, Powell said that the decline in demand for workers "is suggestive of downside risk."
The Two Fed Mandates
The Fed is keeping monetary policy restrictive, meaning interest rates are high enough to weigh on economic growth. "Policy should be tight because tight policy brings inflation down," Powell said.
Powell isn't necessarily that worried about the long-term impact of Trump tariffs on inflation. But the Fed is managing the risk of too-high inflation against the risk of too-high unemployment. As of July 30, Powell said the risk of too-high inflation was the predominant risk, even as downside labor market risk was increasing.
When the two risks become "more in balance, that would imply that policy shouldn't be restrictive, it should be more neutral."
After a weak July jobs report, albeit with an essentially steady unemployment rate, and a pretty much status quo set of inflation reports, Powell is likely to say that the downside labor market risks have increased further, which implies a lower bar to rate cuts.
However, he'll stick to his data-dependent stance at Jackson Hole. The Fed will get the August jobs report and consumer and producer inflation readings before judging whether risks to the two Fed mandates, stable prices and full employment, are balanced enough to resume rate cuts.
Even if Powell is of a mind to resume rate cuts, there's a case to be made for him to slow-walk expectations at Jackson Hole. "Powell has little to gain by pushing the market further toward a September cut," Luzzetti wrote. "It may not take much of a push from Powell to get the market to contemplate a 50 (basis point) reduction."
S&P 500 Futures
The S&P 500 rose 0.3% in early Friday stock market action as markets await Powell's speech. That follows Thursday's 0.4% loss. Over its five-session losing streak, the S&P 500 pulled back 1.4% from its Aug. 14 record closing high.
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