By Daniela Sabin Hathorn, senior market analyst at Capital.com
Federal Reserve Chair Jerome Powell struck a cautious but balanced tone in his highly anticipated remarks at the Jackson Hole Economic Symposium, stressing that the shifting balance of risks in the U.S. economy may warrant an adjustment in policy stance.
Powell said the relative stability of the unemployment rate allows the Fed to “proceed carefully” as it considers any changes to monetary policy. However, he emphasized that the Fed’s dual mandate is under growing strain, with risks to inflation tilted to the upside and risks to employment tilting to the downside.
“Our goals are in tension,” Powell remarked, noting that downside risks to the labour market are becoming more pronounced even as inflation pressures persist.
Powell acknowledged that GDP growth has slowed notably, largely due to weaker consumer spending. On inflation, he highlighted that headline PCE inflation rose to 2.6% in July, with core PCE at 2.9%.
He pointed to tariffs as a key driver of recent price increases:
- The impact of tariffs on consumer prices is now “clearly visible,” and Powell expects these effects to accumulate in the coming months.
- While the base case is that tariff-driven price effects will be short-lived, Powell cautioned there is a possibility—albeit unlikely—that they could spark a more lasting inflation dynamic.
- Importantly, he stressed that the Fed “cannot allow a one-time increase in the price level to become an ongoing inflation problem.”
Turning to the labour market, Powell described conditions as being in a “curious kind of balance.” While job growth has slowed, it has not created a large margin of slack, which the Fed seeks to avoid. He cited tighter immigration policies as a factor contributing to an abrupt slowdown in labour force growth. As a result:
- Labor supply has softened in line with demand.
- The level of job growth needed to keep the labour market stable—the so-called “breakeven” job growth—has fallen sharply.
Powell concluded that the labour market is finely poised, with supply and demand easing together, but warned that risks to employment are becoming more acute.
Outlook
Powell’s speech underscores the Fed’s delicate balancing act: keeping inflation under control while guarding against emerging weakness in the labour market. With consumer demand slowing, tariffs lifting near-term inflation, and immigration tightening labour supply, the Fed chair signalled a cautious, data-dependent path forward.
Markets have taken his remarks as a sign that the Fed is leaning toward near-term policy easing, with odds of a 25 bps rate cut in September rising to 65% to 89%. This has weighed on the dollar, undoing the gains it had achieved earlier in the week. Meanwhile, stocks and gold moved higher as a sign of improved optimism.
US Dollar Index 5-minute chart
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