Last Friday, Federal Reserve chair Jerome Powell delivered a speech at the annual Jackson Hole event representing a marked pivot in Fed policy. Markets responded strongly to his hint that labor-market weakness “may warrant adjusting our policy stance” – i.e. a rate cut may be on the table. Even more significant was the structural recalibration of the Fed’s strategy as part of a 5-year review.

Powell affirmed the Fed’s commitment to its dual mandate (maximum employment and price stability) and its 2% long-run inflation target. He went on to describe policy revisions that shift the Fed away from its pandemic-era tolerance for prolonged inflation overshoots over 2% (to counterbalance periods below 2%) – i.e. the 2020 policy known as flexible average inflation targeting (FAIT). One of the criticisms of the FAIT policy was that it was asymmetric – biased towards tolerating higher inflation and focused only on addressing too-high unemployment (vs. too-low in the case of an overheated market).

Powell was clear that any rate cuts would be due to the “shifting balance of risks” – with inflation now closer to target (although still elevated at today’s 2.9% core PCE) while the labor market is cooling (but still strong at 4.2% unemployment). Job growth slowed dramatically in Jul 2025, spurring Trump’s firing of the Labor Dept’s Bureau of Labor Statistics head. Powell pointed to the labor market being in a “curious kind of balance” with slowing in both worker supply (e.g. from reduced immigration) and demand. If demand continues to fall, labor-market risks could materialize quickly in the form of “sharply higher layoffs and rising unemployment.” Analysts are reading Powell’s comments as the clearest sign yet that the Fed is prepared to act if that happens.

Powell is essentially giving with one hand but providing the Fed with more cover to take it back if needed. While a 25-point rate cut is now widely expected in Sep 2025, the formal language change signals the Fed could reverse its direction if inflation begins to pick up again. The old posture is being replaced with a more symmetric 2% inflation anchor, with the Fed attuned to both sides.

Markets reacted quickly – with the Nasdaq spiking nearly 3%, the small-cap Russell 2000 up 4.6%, and interest-rate futures pricing in an aggregate 75-point cut by Jan 2026. (Equity indices then dipped today on the higher core PCE report.) As of yesterday, 30-year mortgage rates had reached a 10-month low (6.56%).

Powell is walking a fine line as the Fed comes under heavy pressure from the Trump administration to cut rates. Earlier this week, Trump sought to fire Fed Governor Lisa Cook, with Cook countering with a lawsuit yesterday. Trump’s attempt to increase executive influence over the Fed is shaking the foundations of central-bank independence and alarming many in the finance sector. While setting the stage to cut rates, Powell explicitly framed the broader policy revision as part of a routine 5-year process in an attempt to avoid the perception that he is bending to Trump’s will.

Inflation may not be compliant with the direction sketched out by Powell, however. Today’s core PCE report showed a rise from 2.8% year-over-year inflation in Jun 2025 to 2.9% in Jul 2025. Tariffs are showing up in higher consumer prices but still have yet to fully work their way through supply chains. Powell said in his speech that the Fed “expects those effects to accumulate over coming months.” The Fed’s current logic is that there will be a “one-time shift in the price level” due to tariffs – although the idea that a major shift is likely to be transitory hasn’t worked out for the Fed in the past.

The Fed’s forward guidance is deliberately data-dependent and conditional. Powell reiterates that policy is “not on a preset course” and that the Fed will “proceed carefully” based on the labor and inflation data. This could mean that the Fed may be more inclined to reverse course and zig-zag as needed, vs. steering towards a more predictable rate-cutting (or rate hike) cycle.

Policy watchers are viewing the revision as Powell setting his legacy by restoring symmetry to the Fed’s inflation-targeting, reaffirming the 2% target, and solidifying a 5-year strategy review cycle. Even if Powell manages to stay in office through the end of his term, his term as chair runs out in May 2026 in any case. Even though Powell’s term as a member of the Board runs until Jan 2028, Fed chairs usually resign from the Board after their term as chair ends.

Trump will likely have the opportunity during his term to appoint both a new Fed chair as well as 1-2 Board governors of the 7 in total, potentially allowing for a majority of Trump appointees. Each governor serves a 14-year term. (The 12 voting members of the rate-setting Federal Open Market Committee, or FOMC, are the 7 Board governors, the New York Fed president, and 4 of the other 11 regional Reserve Bank presidents on a rotating basis.) Based on Trump’s appointments thus far, he is likely to select loyalists.

One notable point that Powell made during his speech is that the “neutral” rate that will settle out may be higher than what everyone became accustomed to during the 2010s. Unfortunately for those who have been waiting anxiously for the next rate-cutting cycle, there may never be a full return to “normal.”

Jan 31 2025 (3 Shifts): The Fed’s pause on rate cuts

Aug 30 2024 (3 Shifts): Rate cuts are coming in the US