Powell heads to Jackson Hole amid conflicting economic signals

[Federal Reserve Chair Powell Holds Press Conference On Interest Rates]

The highlight of the Kansas City Fed’s Jackson Hole central bank symposium is the Federal Reserve chair’s speech on Friday. This year, the U.S. economy faces economic and political cross-currents as Jerome Powell addresses the gathering for the last time as head of the central bank.

Since the Federal Open Market Committee’s last rate decision to keep rates unchanged in July, a much softer-than-expected July jobs report came out with large downward revisions to May and June’s estimates; the June Consumer Price Index gave hints about inflation from tariffs; and the Producer Price Index ramped those concerns even more.

In other words, just as investors were gaining confidence that the U.S. economy was taking higher tariff rates and stricter immigration policies in stride, the more recent data shook that confidence. Worse yet, it increased the risk that both unemployment and inflation can worsen simultaneously.

“Chair Powell faces an unusually complex environment, where he has to balance within his dual mandate not only what has happened in both inflation development, as well as the labor market, but he’s got to guide investors and market participants in all of the uncertainty that hangs over both,” said Van Hesser, chief strategist at KBRA, in an interview with Seeking Alpha.

“So we do expect him to strike a cautious tone, because of the uncertainty of what lies ahead” — both on the magnitude and the pace of rate cuts that the Federal Open Market is contemplating, Hesser said.

How inflation and the labor market evolve will depend on the impacts of some of the Trump administration initiatives regarding tariffs and immigration policies. Chair Powell is facing the potential for inflation to rebound and “remain relatively sticky,” due to the raft of tariffs [https://seekingalpha.com/news/4476221-trump-issues-revised-tariff-orders] that Trump announced targeting essentially all the U.S.’s trading partners.

While the CPI headline number came in as expected last week, there was some unexpected pressure in services, KBRA’s Hesser said. “It’s that services ex-energy piece that I think has folks concerned, because we do expect goods inflation to materialize.” He expects that goods inflation will kick in in Q4 2025.

The potential for stagflation — where both inflation and unemployment rates worsen — is a difficult position for a central bank. "This really gets at the heart of the FOMC’s dilemma right now" — knowing that rates are restrictive, but at the same time inflation pressure minimizes the FOMC's most potent tool in its toolkit, which is rate cuts, Hesser said.

Chris Lau [https://seekingalpha.com/author/chris-lau], Investing Group Leader for DIY Value Investing, points out that Powell doesn’t always signal [https://seekingalpha.com/article/4814279-five-things-fed-chair-powell-might-address-jackson-hole]the central bank’s next move at his Jackson Hole speech, and he doesn’t need to. With the market still pricing in a 25-basis point rate cut in September, with an 84.8% probability, according to the CME FedWatch tool [https://www.cmegroup.com/markets/interest-rates/cme-fedwatch-tool.html], Powell may see no reason to hint at a September cut. But if he feels the markets are misreading the situation, he'll let them known, as he has before.

Lau expects the Fed chair to discuss still-elevated inflation, the wholesale-level inflation that accelerated in July, and the unusually weak July jobs report that came out early this month.

Citigroup’s Andrew Hollenhorst expects Powell to ”signal that risks to the employment and inflation mandates are coming into balance, setting up the Fed to resume returning policy rate to neutral when he speaks… But he will stop short of explicitly signaling a September rate cut, awaiting the August jobs and inflation reports.”

Citi expects the FOMC to cut the federal funds rate target range by 25 basis points in September, with 25-bp cuts at each of the next four meetings, bringing the target range to 3.00%-3.25% at the March 2026 meeting.

Evercore ISI’s Krishna Guha also doesn’t expect a clear signal for upcoming rate cuts. “We think the message will be consistent with what we see as a pretty solid central case of a ‘cautious cut’ with 25bp in September,” he wrote in a recent note. “He may indicate a step-by-step approach to weighing cumulative data over multiple months before deciding on each move, rather than fuel the idea the next cut automatically implies a series of cuts.”

Seeking Alpha analyst Damir Tokic [https://seekingalpha.com/author/damir-tokic] sees an element of risk if Powell conveys a cautious approach. “If Fed Chair Powell does not signal an imminent cut in the Federal Funds rate, he could get fired,” Tokic wrote. [https://seekingalpha.com/article/4814025-its-do-or-die-for-powell-the-jackson-hole-speech-preview] And while the president legally can’t fire the Fed chair over policy decisions, “the potential mismanagement of the Fed's building renovation” could serve as the “good cause” for dismissal.

Powell may take the opportunity to reassert the importance of central bank independence, Seeking Alpha analyst Justin Purohit [https://seekingalpha.com/author/justin-purohit]wrote recently. “With political tensions elevated and trade policy uncertainty clouding the outlook, reaffirming that monetary policy decisions are data-driven and not politically influenced could be an important theme.”

Credit ratings firms likely back the chair’s stance on the importance of an independent central bank operating free of political influence. For example, S&P Global Ratings said [https://www.spglobal.com/ratings/en/regulatory/article/-/view/type/HTML/id/3426678] one reason it could lower the U.S.’s AA+ sovereign rating would be if political pressures weigh on the “effectiveness of long-term policymaking or independence of the Federal Reserve. This, in turn, could jeopardize the dollar's status as the world's leading reserve currency — a key credit strength.”

DEAR READERS: We recognize that politics often intersects with the financial news of the day, so we invite you to click here to join the separate political discussion. [https://seekingalpha.com/article/4802971-politics-and-the-markets-082025]

MORE ON THE FEDERAL RESERVE

* Jackson Hole: The Moment Of Truth For The US Economy [https://seekingalpha.com/article/4815022-jackson-hole-the-moment-of-truth-for-the-us-economy]
* The 3 Possible Outcomes Of Jerome Powell's Speech And What It Means For Markets [https://seekingalpha.com/article/4814825-the-3-possible-outcomes-of-jerome-powells-speech-and-what-it-means-for-markets]
* Federal Reserve Watch: Is It Time To Stop Quantitative Tightening [https://seekingalpha.com/article/4814142-federal-reserve-watch-is-it-time-to-stop-quantitative-tightening]
* Bessent to start interviewing Fed chair candidates, doesn't back off rate cut argument [https://seekingalpha.com/news/4486942-bessent-to-start-interviewing-fed-chair-candidates-doesnt-back-off-rate-cut-argument]