Investors brace for policy shifts
Federal Reserve Chair Jerome Powell indicated that the central bank could lower interest rates in the coming months, though he stopped short of committing to a timeline.
In a closely watched speech at the Kansas City Fed’s annual symposium in Wyoming, Powell said the US economy is showing signs of strain, with slower hiring and softer growth challenging the Fed’s policy path, according to The Canadian Press.
The economy grew at a 1.2% annual pace in the first half of 2025, down from 2.5% last year, and monthly job growth averaged just 35,000 in recent months, well below 2024 levels. The unemployment rate edged up to 4.2%, while tariffs have begun to push some prices higher.
Powell noted that the balance of risks is shifting, with downside risks to employment increasing even as inflation remains elevated.
As reported by The New York Times, Powell described the labor market as being in a “curious kind of balance,” shaped by declining demand for workers and a slowdown in labor supply due to tighter immigration policies. He cautioned that a weakening job market could lead to sharper layoffs and rising unemployment if current trends persist.
Despite these pressures, Powell said inflation remains above the Fed’s 2% target, with core personal consumption expenditures up 2.9% year over year. Tariffs have fueled some of this increase, and their full impact on prices could take months to materialize.
The Fed’s benchmark rate currently sits at 4.3%. While investors anticipate a potential rate cut at the Fed’s September meeting, Powell stressed that any adjustments will be gradual, describing the current policy stance as “modestly” restrictive.
Market reactions were swift following Powell’s remarks, The New York Times reported. The S&P 500 closed up 1.5%, the Nasdaq Composite gained 1.9%, and the Russell 2000 rose over 3%. Yields on two-year Treasury notes fell to 3.69% as expectations for a cut grew.
According to Yahoo News report, Powell’s comments come amid increasing pressure from President Donald Trump, who has repeatedly called for more aggressive rate cuts, arguing that lower borrowing costs would help manage the government’s $37 trillion debt.
Despite this, Powell and other Fed officials have emphasized that policy decisions will be guided by economic data rather than political pressure. Cleveland Fed President Beth Hammack reaffirmed this position, stating that she remains focused on outcomes for the public, independent of external criticism.
The Fed also released revisions to its monetary policy framework, scaling back its “flexible average inflation targeting” strategy adopted in 2020. The updated approach returns to a simpler model of targeting 2% inflation over time and clarifies that the Fed may adjust rates when labor market conditions deviate from sustainable levels.
While Powell acknowledged that risks to the economy are growing, he maintained that any future policy decisions would be based solely on evolving economic conditions and the Fed’s dual mandate of maximum employment and price stability.
