Jackson Hole Economic Symposium

Powell opens the door to a September cut amid shifting risks 

• During his keynote speech at the Jackson Hole Economic Symposium, Fed Chair Powell struck a notably dovish tone, solidifying expectations of a rate cut at the September meeting, as he noted that the baseline outlook and the shifting balance of risks “may warrant adjusting the policy stance.” He highlighted the recent weakness in payroll data and acknowledged that the downside risk to employment is increasing while arguing that the effects of tariffs on inflation are likely to be relatively short lived.
   
• Powell also outlined changes to the Federal Open Market Committee’s 2025 Statement on Longer-run Goals and Monetary Policy Strategy, which came after a comprehensive review of the framework that is meant to ensure the Fed is best equipped to navigate changing economic conditions. Notable changes include the return to a flexible inflation-targeting strategy, a reduced emphasis on the effective lower bound on interest rates, and the introduction of a more balanced strategy for when the Fed’s employment and inflation goals are in conflict.
    
• While a rate cut at the September meeting appears more than likely, in line with our long-held view, we expect that the Fed will maintain its cautious data-driven approach as tariff-related price pressures continue to wind through the economy. Looking ahead, we expect a 25-basis point (bps) cut to follow in December, with an additional 100bps of easing likely in 2026 as economic and labor market conditions deteriorate more visibly.

Employment risk calls for a cut, but policy isn’t on a preset path

Fed’s focus shifting from inflation to the labor market. Powell used his speech as an opportunity to recalibrate the Fed’s assessment of the balance of risks, which had leaned more heavily toward inflation at the July FOMC meeting. He acknowledged the substantial slowdown in payroll growth over recent months but pointed out that the unemployment rate remains relatively low, with other labor market indicators showing little change. Powell also highlighted that both the supply of and demand for workers have declined, resulting in a fragile equilibrium that he called a “curious kind of balance.” Against this backdrop, he warned that risks to employment are rising and cautioned that “if these risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”

Inflation remains a concern even if tariff impact may be short lived. Powell emphasized that inflation has exceeded the Fed’s 2% target for over four years. Echoing the minutes of the July FOMC meeting, he pointed out that the influence of tariffs on consumer prices is now evident but is likely to result in a "one-time shift in the price level,” rather than ongoing upward pressure on inflation. He also acknowledged that while there is a possibility that tariffs could trigger lasting inflation pressures or influence long-term inflation expectations, current market and survey indicators suggest that inflation expectations remain stable and aligned with the Fed’s long-term goal of 2%.

Retaining a cautious data-dependent approach. Maintaining a prudent and data-driven approach, Powell balanced his dovish message by reiterating that monetary policy is not on a preset course. Amid mounting political pressures, he also reaffirmed the Fed’s independent decision-making process by stressing that the decisions by FOMC members are based solely on their assessment of the data and its implications for the economic outlook and the balance of risks.

Fed revises its policy framework to better align with post-pandemic era

Reduced emphasis on the effective lower bound. The first key change to the policy framework was the removal of the language that made the effective lower bound (ELB) on interest rates a central concern. The statement now clarifies that “monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions.” The Committee also reaffirmed its readiness to use all available tools to achieve its goals, especially if the ELB becomes a constraint.

Return to “flexible inflation targeting.” The Committee reverted to a flexible inflation targeting framework and discarded the “makeup” strategy, which had previously allowed for intentional moderate overshoots of the inflation target to compensate for past shortfalls. The experience of unexpectedly high inflation in the aftermath of the pandemic made this strategy obsolete. The revised statement notes that the Fed commits to “act forcefully to ensure that longer-term inflation expectations remain well anchored,” highlighting the Fed’s importance to bringing inflation back to target without causing high unemployment, and to supporting both sides of the dual mandate.

Clarification of maximum employment language. The Fed also changed the language around maximum employment. The previous focus on mitigating “shortfalls” rather than “deviations” reflected uncertainty in real-time assessments of the natural rate of unemployment. Due to communication challenges around that term, the updated statement now articulates that employment can sometimes exceed real-time estimates of maximum employment without necessarily creating risks to price stability.

Balanced approach during conflicting goals. Finally, the framework was clarified for situations where the employment and inflation goals are not complementary. The statement now emphasizes that such a situation requires the Fed to balance both sides of its dual mandate, weighing the extent and timing of deviations from each goal. This change brings the framework closer to the original 2012 language, acknowledging that the return to each objective may occur on different timelines.

The views reflected in this article are the views of the author(s) and do not necessarily reflect the views of Ernst & Young LLP or other members of the global EY organization.