Powell Only Opened the Door to Rate Cuts. Don’t Get Ahead of Him.

Jerome Powell met with (from left to right) the BOE’s Andrew Bailey, ECB’s Christine Lagarde, and Bank of Japan’s Kazuo Ueda on Friday. (David Paul Morris/Bloomberg)

MORAN, Wyo.—At a resort with sweeping views of the Teton mountain range, Jerome Powell and a worldly collection of economists and central bankers are spending a sunny weekend discussing monetary policy.

Every August, the Kansas City Federal Reserve hosts its Economic Symposium in Jackson Hole. What began in 1982 as a lure to get then-Chair Paul Volcker out West has become one of the central bank’s most watched gatherings—at least to those in the know. Inside the taxidermy-and-tweed lodge, once the stomping grounds of the Rockefellers, central bank heads mingled on Friday morning among snapping cameras as tourists decked out in REI’s finest looked on, baffled by the scene.

Moments earlier, at his final keynote speech at the confab, Powell gave markets just what they wanted: a signal that the Fed could cut rates. But he didn’t give them much else. Instead, he used the opportunity to raise concerns about the labor market, which is also the theme of this year’s conference.

Powell said that with policy in restrictive territory, the shifting balance of risks “may warrant adjusting our policy stance.” It wasn’t a promise, but it was close enough for markets to seize on. Traders boosted their bets on a September rate move, putting nearly 86% odds of a quarter-point cut, according to the CME FedWatch Tool. The Dow Jones Industrial Average soared to its first record of the year, while bond yields slipped.

Beyond that, Powell was vague. He stressed that monetary policy “was not on a preset course” and left the real debate—how many cuts and how fast—for another day.

However, his concern about employment was front and center. Powell described the labor market as in a “curious kind of balance,” with demand and supply both fading at once. The July payrolls report showed that job gains have slowed to an average pace of 35,000 a month over the past three months, down from 168,000 a month during 2024.

“Downside risks to employment are rising,” Powell said. And if they continue to materialize, “they can do so quickly in the form of sharply higher layoffs,” he said.

That puts a lot of weight on the data that comes between now and the Fed’s September meeting, starting with the August jobs report. A weak print could further justify a September cut and push the Fed into a deeper easing cycle. A stronger number would give Powell more cover to move slowly.

Powell still believes the Fed has the flexibility to wait. He noted that the Fed’s interest rate was “now 100 basis points closer to neutral than it was a year ago,” implying that monetary policy is less restrictive and therefore there isn’t as much urgency to cut quickly.

The Fed may not need to cut as deeply, either. Powell said the so-called R-star, the theoretical interest rate that allows the economy to grow at full potential with stable inflation, may now be higher than it was in the 2010s.

“We cannot say for certain where rates will settle out over the longer run, but their neutral level may now be higher,” he said, citing productivity, demographics, and fiscal policy. In practice, that means that even after two or three rate cuts, monetary policy could still be in restrictive territory.

There’s also the other side of the Fed’s dual mandate, inflation. Powell expressed concern that President Donald Trump’s tariff policy would continue to increase prices for months to come, making the central bank’s decision more difficult.

For markets dreaming of a swift return to easy money, Powell was quietly signaling the opposite. In other words, the Fed could cut in September, but that doesn’t necessarily mean the beginning of another easing cycle.

The Fed’s summary of economic projections, due next month, will show whether the committee agrees—and how many cuts they envision the rest of the year.

Write to Nicole Goodkind at nicole.goodkind@barrons.com