Federal Reserve Chair Jerome Powell on Aug. 22 opened the door to a September interest rate cut despite a recent inflation rise, asserting that “downside risks to employment are rising.”

Although inflation is still “somewhat elevated,” he added, “At the same time, the balance of risks appears to be shifting,” Powell said in a speech he delivered at the Fed’s annual conference in Jackson Hole, Wyoming. Separately, Powell also announced a reversal of a 5-year-old policy shift that could keep interest rates somewhat higher over the long term.

“Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers,” Powell said in the prepared text. “This unusual situation suggests that downside risks to employment arising. And as those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”

Investors cheered the prospect of a likely rate cut at the Fed's Sept. 16-17 meeting. In late morning trading, the Dow Jones Industrial Average jumped 875 points and the S&P 500 index was up 1.7% at 6,475.

A quarter-point rate cut next month would reduce borrowing costs for millions of Americans on credit cards, auto loans and certain mortgages, among other types of loans. It also would lower bank savings rates that have gotten more generous the past few years. Futures markets put the odds of a September cut at 90% and are also pricing in another quarter-point rate decrease in December.

Powell's remarks represent a notable shift in his stance the past few weeks.

In late July, despite slowing job growth. Powell said officials are focused mostly on the unemployment rate – still a historically low 4.2% – rather than weakening job numbers because Trump's immigration crackdown has reduced the number of payroll gains needed to keep unemployment stable. In other words, if companies are posting fewer job openings, it’s not so troublesome if fewer people are looking for work.

And Powell noted that while the unemployment rate is roughly at the Fed’s goal of full employment, inflation of just under 3% is still a ways from the 2% target, bolstering the case to keep rates elevated.

But that was before the bleak July jobs report.

Employers added just 73,000 jobs last month and employment gains for May and June were revised down by an outsize 258,000.

Powell noted Fed officials face a vexing choice as they debate whether to resume their interest-rate cutting campaign in September after a long pause.

President Donald Trump’s tariffs are pushing inflation higher, Powell said. "The effects of tariffs on consumer prices are now clearly visible," he said.

Last month, some goods likely to be affected by the duties, such as furniture and video and audio products, rose sharply. Others, including apparel and toys, moved up more modestly.

Powell said a "reasonable base case" is that the tariffs represent a one-time bump to prices and the effects "will be relatively short-lived." Another possibility, he said, is that the fees affects consumers’ inflation expectations and drive up wages in a toxic cycle. But he added "that outcome does not seem likely," seemingly providing officials an opening to lower rates.

With job growth slowing and inflation rising, Powell acknowledged the tension between its two mandates.

“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside – a challenging situation,” he said. “When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.”

Powell didn’t commit to a rate cut next month. Fed officials will still review the August employment and inflation reports in early September before their meeting mid-month, providing a more rounded picture.

But he said, “With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” he said.

In a note to clients, economist Stephen Brown of Capital Economics wrote Powell's remarks amount to "a clear indication that a September rate cut is now the most likely outcome." He added, however, that Powell's "lingering caution suggests that either a very positive August employment report or a much more concerning set of price data could still trigger a delay."

The Fed lowers rates to support a sagging economy and job market. It raises rates or keeps them higher for longer to cool the economy and tame inflation. Officials slashed a key rate by a percentage point late last year but have been on hold since December as they assess the impact of the import levies on prices.

Trump’s tariffs are expected to push up prices and hamper growth as they sap consumer purchasing power and curtail spending, which makes up about 70% of economic activity. That has posed a challenging dilemma for Fed officials.

Trump has been badgering Powell and other Fed officials to cut rates for months, but Powell has said the independent agency isn’t influenced by politics and will do what’s best for the economy.

What is the new monetary policy framework?

Powell also announced a shift of its interest rate policy over the longer term.

In 2020, the economy had been growing slowly during the decade after the Great Recession of 2007-2009 and inflation remained stubbornly low. That posed a risk because persistently low inflation can lead to deflation, or falling prices, that may prompt consumers to put off purchases, hobbling the economy.

So instead of targeting 2% inflation, the Fed decided to aim for inflation that averages 2% over time. If inflation undershoots the Fed's target, officials would allow it to run “moderately above 2% for some time," as Powell put it, to make up for periods of very low inflation. The Fed also said its goal of “maximum employment” would be determined by “shortfalls" from that level rather than “deviations.”

That meant officials became less concerned about very low unemployment, believing it would be unlikely to spark high inflation while helping create more jobs for low-income and minority workers.

But the Fed's willingness to let inflation run hotter for longer may have contributed to the post-COVID-19 price surge, said Barclays economist Jonathan Millar. And with inflation and consumers’ inflation expectations running higher than normal the past few years, the Fed has been focused on wrestling down price increases, not nudging costs higher.

So Powell said on August 22 the Fed is returning to its previous policy of targeting 2% inflation, eliminating references to a “makeup” strategy. Officials also removed the idea of focusing on “shortfalls” in employment while still providing some leeway to let the jobless rate fall lower than an ideal level consistent with low inflation.

The Fed “recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability,” the new Fed policy statement says.

This story has been updated with new information.

This article originally appeared on USA TODAY: Fed's Powell signals likely September interest rate cut, citing 'downside risks' to jobs

Reporting by Paul Davidson, USA TODAY / USA TODAY

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