U.S. FOMC Chair Powell Speech at Jackson Hole Annual Economic Symposium (August 22, 2025)

Chair Powell signals FOMC bias to easing, leaving the door open to September cut

• At the Federal Reserve Bank of Kansas City's Jackson Hole Economic Symposium, Fed Chair Jerome Powell delivered a much-anticipated speech, titled Monetary Policy and Fed's Framework Review.
• Powell highlighted the challenges facing the U.S. economy, including significantly higher tariffs and tighter immigration policy, with both affecting supply and demand. Powell noted that, "in this environment, distinguishing cyclical developments from trend or structural developments is difficult. This distinction is difficult because monetary policy can work to stabilize cyclical fluctuations but can do little to alter structural changes". 
• The Chair's assessment of the labor market was notably more downbeat than his characterization at the July press conferences, noting, "the slowdown is much larger than assessed just a month ago", but balanced that with the unemployment rate remaining "historically low … and broadly stable over the past year". 
• On tariffs, Powell noted that inflation passthrough has started to materialize on some categories of goods and, "… we expect those effects to accumulate over the coming months". But also noted that both survey and market-based measures of inflation expectations remain well anchored and said it is a reasonable "base case" that tariffs will have a one-time impact on inflation. However, he also acknowledged the risk of a wage-price spiral, though that appears less likely given current labor market conditions. 
• Lastly on monetary policy, Powell noted "with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance" – highlighting the FOMC's bias towards easing. 
• Powell's speech also highlighted the Fed's 2025 framework review. The last review was conducted in 2020, where the changes were largely the result of the policy rate being at the effective lower bound for a significant period. The 2025 framework review made three notable changes, including: 
  
  • Removing language indicating that the effective lower bound was a defining feature of the economic landscape and instead noted that "monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions".
  • Returned to the framework of flexible inflation targeting and eliminated the "makeup" strategy. Back in 2020, the motivation for allowing some inflation overshoot was to account for the fact that inflation had run persistently below the Fed's 2% target over the decade following the Global Financial Crisis. However, the persistent overshoot post-pandemic has led to concerns that it could lead to inflation expectations becoming unanchored.
  • The Committee also revised its language on maximum employment. The 2025 framework removed the reference to "shortfalls" and instead states that "the Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability".   

Key Implications

• Chair Powell struck a more dovish tone in today's speech, sending a clear signal that further policy easing is on the way. While a September cut is looking more likely, it is still not a guarantee and will largely hinge on the August employment and inflation reports. However, markets responded sharply, with the S&P 500 extending earlier gains and is now up 1.5%, while the 2-year Treasury fell 10 basis points to 3.69%. Fed futures have shifted back to pricing in a 90% probability of a September cut – up from yesterday's 70%.  
• There's a growing divide among policymakers on what's behind the recent slowing in employment. Powell and others acknowledge the role of supply-side factors, including tighter immigration and point to the low and stable unemployment rate as a sign of overall balance. Conversely, Waller and Bowman attribute the cooling to a broader slowing in economic activity. But it's clear that neither camp would disagree that the downside risks have increased since the July FOMC meeting. We would argue that today's market reaction could be a bit overdone. With the Fed's dual mandate coming into tension, Fed officials will remain acutely attuned to risks on both sides, meaning the FOMC's approach to adjusting policy is probably best characterized as a move to a less-restrictive environment as opposed to a return to neutral.      

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