Federal Reserve Chair Jerome Powell’s remarks at the Jackson Hole symposium on Friday sent a strong signal that the central bank is preparing to cut interest rates as early as next month, with markets now heavily betting on a September move.
Powell said the Fed “may need to cut rates” but will proceed carefully, balancing still-elevated inflation pressures with signs that the labor market is cooling, according to Reuters. He also pointed to tariff-related price risks that the Fed must “assess and manage,” underscoring the delicate position policymakers face.
Traders reacted swiftly. Fed funds futures now imply an 85 to 90 percent chance of a 25-basis-point reduction at the Sept. 16–17 policy meeting, up from roughly 75 percent before Powell’s speech, according to Reuters. The dollar weakened sharply and Treasury yields dropped, reflecting the repricing of policy expectations.
Equities also surged on the prospect of lower borrowing costs. On Friday, the Dow Jones Industrial Average jumped 846 points, or 1.9 percent, to a record close of 45,631.74. The S&P 500 rose 1.5 percent, and the Nasdaq Composite gained 1.9 percent, the Associated Press reported. Futures trading on Sunday evening was little changed as investors digested the rally, according to Barron’s.
Major Wall Street banks are adjusting forecasts. Barclays and BNP Paribas now expect a September cut, with some analysts penciling in a second reduction by December, according to Reuters. The Financial Times noted that while Powell’s dovish tone has fueled bets, the final decision still hinges on upcoming economic data.
That data includes this Friday’s release of the Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, followed by the September 5 jobs report. Powell himself put “heavy weight” on the next labor market print, which comes as payroll growth has slowed to an average of about 35,000 jobs in recent months and unemployment has edged up to 4.2 percent, according to Reuters. Inflation, meanwhile, remains above the Fed’s 2 percent target, and new tariffs threaten to push prices higher, the Financial Times reported.
Markets will be watching not just whether the Fed delivers a cut, but how officials frame the path forward. Investors and strategists told Reuters that one rate reduction would support housing, small caps, and high-yield credit, but it would not resolve long-term concerns if inflation remains sticky. The key question is whether September marks the start of a cutting cycle or a one-time adjustment.
Political noise adds another layer of complexity. Reuters reported Monday that the dollar’s weakness also reflects concerns about political pressure on the Fed, including attacks on Powell and other officials. Any perception that the central bank’s independence is under threat could lift long-term yields even if policy rates are cut. Powell’s explicit warning about tariff-driven price pressures likewise suggests that easing could be slowed or paused if inflation re-accelerates.
As of Monday morning, the base case remains clear: a high probability of a 25-basis-point cut in September, with a second move possible before year-end, according to Reuters’ survey of broker forecasts and market pricing. But with the PCE data and the jobs report still ahead, markets are braced for the possibility that the Fed could either validate or challenge those expectations.
