Rate cut watch: All eyes on Fed Chair Powell's final Jackson Hole speech

As Federal Reserve officials gather in Jackson Hole, Wyo., this week for their 43rd annual economic policy symposium, Federal Reserve Chair Jerome Powell and his central bank colleagues face a dilemma: hold interest rates steady in September on account of rising inflation, or lower rates thanks to weaker job market reports.

That’s what a very divided Fed is tussling with as markets are pricing in a quarter percentage point rate cut next month — and President Trump pounds Chair Powell to lower rates.

Investors will be listening for clues about what the Fed may do in September when Chair Powell gives his speech on Friday at 10 a.m. ET at the storied Jackson Lake Lodge in the middle of Grand Teton National Park. It will be his last speech in Jackson Hole as Fed chair.

Fed officials have been closely watching for the impact of tariffs on inflation. But recent readings from the Consumer Price Index and the Producer Price Index have shown mild effects from tariffs as services inflation unexpectedly heated up in July, catching the attention of some Fed officials. Services account for the majority of the US economy, while goods just account for 11% of GDP. Chicago Fed president Austan Goolsbee cautioned last week that if we see services inflation heading higher in subsequent reports, that would be a concern.

Other officials, including Kansas City Fed president Jeff Schmid, Cleveland Fed president Beth Hammack, and Atlanta Fed president Raphael Bostic, have been more concerned about inflation.

Inflation is now running a full percentage point above the Fed’s 2% target.

But Bostic also believes that a weaker-than-expected July jobs report raises the risk that the labor market may be weakening. Bostic says the Fed’s task is to figure out how much the job market has slumped by the next policy meeting and whether the central bank should cut rates.

Read more: How jobs, inflation, and the Fed are all related

The latest government jobs report showed a weaker reading on the labor market, with just 73,000 jobs added in July and with downward revisions to the prior two months, bringing the three-month average employment gain down to 35,000.

Following that report, San Francisco president Mary Daly and Minneapolis Fed president Neel Kashkari both turned from more of a “wait and see” approach to one of concern about the outlook for the job market. They join Fed governors Chris Waller and Michelle Bowman, who both dissented at the July policy meeting, preferring to cut rates by 25 basis points on concerns about jobs.

Following the July policy meeting, Chair Powell reiterated that more time is needed to assess how Trump’s tariffs will affect the path of inflation and the strength of the economy. He told reporters there is still a “long way to go” to figure out exactly what the impact of tariffs is, adding, “You have to think of this as still quite early days.”

He also made it clear that inflation was still a concern as the Fed balances its dual mandate of stable prices and maximum employment, saying, “The economy is not performing as though restrictive policy is holding it back inappropriately, and modestly restrictive policy seems appropriate. All that said, there’s also downside risk to the labor market.”

Powell noted that a good amount of data before the September policy meeting will help inform the Fed’s view. The question is whether the weak July jobs report is enough for Powell, who saw downside risks to employment in July.

Markets are pricing in a rate cut for the next policy meeting on Sept. 17, though odds have receded slightly in recent days following a hotter-than-expected report on wholesale prices.

“Markets are still wholly convinced that the Fed will cut rates by 25bp at the upcoming FOMC meeting in September and follow that up with at least one other cut in October or December,” said Paul Ashworth, chief North America economist for Capital Economics.

Ashworth says he expects that Powell, at Jackson Hole, will caution that a “modestly restrictive policy stance remains appropriate,” as the Fed chair did in his press conference following the July policy meeting.

Luke Tilley, chief economist for Wilmington Trust, said he could also envision Powell expanding on how the Fed takes into account backward-looking data versus forecasted data to make a decision on monetary policy. He is also looking to see whether the Fed chair expounds on how the central bank gauges its progress on its two goals, maximum employment and price stability, and how it calibrates interest rates accordingly.

Framework unveiled?

Fed Chair Powell is also set to announce the results of the central bank’s policy framework review at Jackson Hole. The Fed is revisiting changes made to its strategy for monetary policy, tools, and communication last changed in 2020. The central bank adjusts its framework every five years.

The last iteration of the framework adopted a flexible average inflation target, given that in the years preceding 2020 inflation remained slightly below the Fed’s 2% target. Given the recent bout of inflation, and the risks it poses to inflation expectations and consumer sentiment, the Fed is likely to drop that.

“While the adoption of the new framework in 2020 was not the primary factor behind the Fed’s delay and the substantial inflation overshoot, it contributed to this outcome,” said Matt Luzzetti, chief US economist for Deutsche Bank.

As a result, Luzzetti expects Powell’s speech to restore a more preemptive strategy for monetary policy that recognizes risks of supply shocks and return to a balanced view of inflation and the job market.

“The economic environment has changed significantly since 2020, and our review will reflect our assessment of those changes,” Powell said in a speech in May.

Powell noted in that May speech that inflation could be more volatile going forward than in the 2010s and that the US may be entering a period of more frequent, and potentially more persistent, supply shocks.

Powell also said that Fed officials may reconsider “shortfalls” around trying to get to the Fed’s 2% inflation target and average inflation targeting. He also stressed enhancing the central bank’s formal policy communications, particularly regarding the role of forecasts and uncertainty.

Investors will watch for whether the Fed rolls out changes to its quarterly Summary of Economic Projections, which contains the famous “dot plot,” a compilation of each member of the FOMC’s expectations for interest rates that year.

Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.