Fed’s Powell opens door to potential rate cuts at Jackson Hole

Investing.com -- Federal Reserve Chair Jerome Powell delivered a closely watched speech during the central bank’s annual gathering in Jackson Hole, Wyoming, a venue that has historically set the tone for monetary policy in the year ahead. At the event, Powell clearly signaled to the market he is open to a September rate cut, which created a rush to risk assets.

Fed’s Powell signals readiness to cut rates

Fed Chair Powell opened his remarks at Jackson Hole by signaling the Fed is prepared to adjust course if needed.

“[t]he shifting balance of risks may warrant adjusting our policy stance,” he said, in language that markets are reading as teeing up a potential rate cut.

Powell noted that while labor markets remain in balance, it is “a curious kind of balance that results from a marked slowing in both the supply of and demand for workers.”

“This unusual situation suggests that downside risks to employment are rising,” Powell added.

“And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”

In response to his remarks, traders are boosting wagers on a Fed rate cut in September.

The central bank is also dropping its 2020 flexible average inflation targeting framework.

"As downside risks to the jobs outlook rise, Powell feels that it may be appropriate to adjust the Fed’s policy stance," Vital Knowledge’s Adam Crisafulli said in a flash note, reacting to Powell’s speech.

"While Powell is more dovish than when he last spoke in July, this is hardly an extremely dovish speech on an absolute basis. He is still nervous about inflation," Crisafulli added.

September rate cut bets surge

Just weeks ago, traders were almost unanimous in expecting a rate cut at the September meeting, but before today’s speech, that conviction had faded to below 70%. It has now mostly returned.

Traders are now pricing in an 88.1% chance of a September rate cut, according to Investing.com’s Fed Rate Monitor Tool.

As of 11:00 AM ET, stocks are surging. The Dow is up 885 points, the S&P 500 is up 102, and the Nasdaq is up 407.

Gold futures rose 1.1% to $3419.20, and Bitcoin rose 2.7% to $115,816.

What are market watchers saying

"For a while this was blue touchpaper territory. After months of equivocation and intense pressure from President Trump, America’s most senior central banker has finally signalled his willingness to cut US interest rates," said Samuel Fuller, Director at Financial Markets Online.

"Fed Chair Jerome Powell opened the door a little wider to interest rate cuts restarting soon, although by still stressing that they will proceed with caution his remarks weren’t necessarily a pre-commitment to a September move," said CIBC (TSX:CM) economist Andrew Grantham.

"Chair Powell could have been super balanced, or even hawkish," Padhraic Garvey, ING’s Regional Head of Research, Americas, opined. "But he effectively chose to endorse the market discount for a rate-cutting phase ahead. It’s had quite the reaction. Risk assets are up, the dollar down, so’s the front-end yield. Watch longer tenor yields though - the deep thinkers of the bond market, and not quite convinced cuts are all good."

Powell under pressure from Trump

This year’s remarks come at a pivotal moment, as policymakers weigh the first potential rate cut of 2025 following more than a year of holding borrowing costs steady to assess the impact of tariffs and elevated price pressures.

"Fed chairs have used the symposium in the past to announce changes to the monetary policy outlook," UBS’s Mark Haefele wrote in a note.

"This time last year, Powell said the “time has come for policy to adjust,” opening the door to the start of the current easing cycle," he added.

For months, President Donald Trump has intensified public pressure on the Fed to lower rates, arguing that cuts would stimulate economic growth and reduce interest costs on government debt. His campaign escalated further this week when he called for the resignation of Fed Governor Lisa Cook after a Trump administration official accused her of mortgage fraud.

The central bank, however, has so far resisted political demands, maintaining its federal funds rate in a target range of 4.25% to 4.5%, levels still near the highest in two decades after the sharp tightening cycle that followed pandemic-era inflation.

(Frank DeMatteo contributed to this article)