Market analysts have been searching for signs all year that indicate when the Federal Reserve might finally start lowering interest rates again.
In a highly anticipated speech Friday at Jackson Hole, Wyoming, Fed Chair Jerome Powell gave his clearest indication yet that a rate cut is on the way.
“With policy in restrictive territory,” Powell said, “the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
Investors interpreted Powell’s “Fedspeak” as a clear sign that the U.S.’s central banking system will likely lower rates as soon as the next Federal Open Market Committee meeting in September. Moments after his speech, U.S. stock prices soared. The Dow Jones Industrial Average notched a fresh all-time high.
The S&P 500 and the tech-heavy Nasdaq surged Friday, too, before the rate-cut optimism started to wane early Monday.
Will the Fed cut rates in September? Experts react
The Fed chair often makes cryptic remarks and has never promised rate cuts ahead of time. But in Powell’s speech Friday, he paved the way for an imminent cut.
He highlighted the Fed’s so-called dual mandate that stipulates maximum employment and stable prices for American families. He pointed to the stable but weakening labor market as grounds for a potential policy shift. For instance, job growth has slowed considerably compared to last year, but Powell noted that the unemployment rate remains at a historically low level of 4.2%
“Powell essentially delivered September’s rate cut, taking out all the steam and speculation of next month’s meeting,” Seema Shah, chief global strategist at Principal Asset Management, said in commentary shared with Money.
This is despite what Powell says are “clearly visible” signs that President Donald Trump’s tariffs are pushing up prices for consumers. According to the Budget Lab at Yale University, tariff-fueled price increases are expected to cause inflation to rise by 1.8 percentage points “in the short run.” But experts aren’t sure exactly when consumers will feel those impacts. Whatever the ultimate inflationary effects of tariffs may be, the Fed sees them as “relatively short lived.”
“A reasonable base case is that the effects will be relatively short lived — a one-time shift in the price level,” Powell said. “Of course, one time does not mean all at once. It will continue to take time for tariff increases to work their way through supply chains.”
In the Friday speech, Powell “emphasized the moderating employment market as opposed to still-elevated inflation,” Jack McIntyre, a portfolio manager at Brandywine Global, said in emailed commentary. “The message was that the Fed is going to cut policy rates at the September FOMC meeting.”
Before Powell’s speech, 70% of investors were expecting a rate cut in September, according to the CME Group’s FedWatch tool. In the hours after his speech, that percentage grew to nearly 90%. On Monday, investors’ certainty of a September rate cut shrunk slightly, edging down to 84%.
How big could the rate cut be?
Historical rate changes suggest that 0.25 percentage point fluctuations are the standard. Cuts or increases to interest rates larger than that are typically in response to alarming economic data releases. For example, when pandemic-era inflation began picking up notably in 2022, the Fed delivered a series of 0.50 and 0.75 percentage point hikes.
Lately, baseline interest rates have been frozen in the 4.25-4.5% range. The Fed last cut rates in December 2024. Investors now overwhelmingly expect a 0.25 percentage point cut to break the freeze. According to FedWatch, 0% of investors currently expect a jumbo 0.5 percentage point reduction.
For months, Trump has been pressuring the Fed chair to slash interest rates. The president has ratcheted up his long-running feud with Powell and the Fed, recently calling on Powell to resign and threatening to fire a governor of the central bank. In theory, the Fed is supposed to be an apolitical entity focused on keeping the economy stable. But Trump has made it clear he wants rates much lower and is comfortable with chipping away at the Fed’s independence.
“There is little economic justification for an emergency-sized 50 basis point cut,” Shah said. “Should the Fed opt for such a move, markets may interpret it as a sign of political influence rather than data-driven decision-making.”
Still, the next FOMC meeting is about three weeks away. And much can happen in the meantime. All eyes will be on the August jobs report, to be released Sept. 5, to confirm the size of the cut.
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