JACKSON HOLE, Wyo. — When Federal Reserve Chair Jerome Powell gives his last speech in Jackson Hole, Wyo., investors will be listening for whether he signals an interest rate cut is coming next month.
But Powell’s outline of two bigger questions facing the Fed will shape the future of the central bank in ways that will outlast his tenure and mark a key part of his legacy as chair.
Powell’s widely anticipated speech on Friday morning will be delivered as the debate over the state of the economy, and the possibility of rate cuts, heats up.
In interviews with Yahoo Finance on Thursday, Kansas City Fed president Jeffrey Schmid and Cleveland Fed president Beth Hammack both offered some caution on the need for interest rate cuts as soon as next month, given recent inflation data.
“There’s a lot of data we’re going to get between now and September, and I walk into every meeting with an open mind about what the right thing to do is,” Hammack said. “But with the data I have right now, and with the information I have, if the meeting was tomorrow, I would not see a case for reducing interest rates.”
Schmid and Hammack’s colleagues at the Federal Reserve Board, Michelle Bowman and Chris Waller, have been among those more vocal about the need for rate cuts. Investors were assigning roughly 69% odds on a 0.25% cut from the Fed on Sept. 17 as of early Friday.
Disagreement over the Fed’s next move, however, is only a small part of the backdrop against which Powell is set to speak.
Most notable is pressure from President Trump, who this week called for Federal Reserve governor Lisa Cook to resign amid a controversy over two mortgage loans. The Financial Times reported Thursday that the Department of Justice sent Powell a letter calling on the Fed chair to remove Cook from her post.
Fed Governor Lisa Cook is under fire from President Trump for two mortgage loans she took out before she joined the central bank. (AP Photo/Manuel Balce Ceneta) ·ASSOCIATED PRESS
Trump, who refers to Powell as “Too Late” for not cutting rates earlier this year, has regularly commented on Fed policy and said interest rates should be much lower than the current benchmark range of 4.25%-4.50%. Treasury Secretary Scott Bessent has also weighed in on monetary policy, saying in an interview earlier this month the Fed ought to consider cutting rates by 0.50% in September.
“I think that having an independent central bank has been an institutional arrangement that has served the public well,” Powell said last month. “And as long as it serves the public well, it should continue and be respected.”
Powell is also expected to lay out changes to the central bank’s policy framework review, which articulates the Fed’s strategy and commitment to fulfilling its congressional mandate for stable prices and maximum employment.
In particular, the central bank is expected to drop so-called average inflation targeting, a policy put in place pre-pandemic when inflation was running low and Fed officials wanted to avoid deflation.
This strategy has said that if inflation ran below 2% in years past, the Fed would tolerate it running above 2% in the future on the theory that it averages out. Given the recent bout of inflation and the risks it poses to the economy, the Fed is expected to drop that and focus on an inflation target of simply 2%.
Powell signaled the change in a speech in May.
“In our discussions so far, participants have indicated that they thought it would be appropriate to reconsider the language around shortfalls,” Powell said. “And at our meeting last week, we had a similar take on average inflation targeting.”
Fed Chair Jerome Powell, right, and President Donald Trump during a visit to the Federal Reserve in July. (AP Photo/Julia Demaree Nikhinson) ·ASSOCIATED PRESS
The Fed first created its monetary policy framework in 2012, which it adjusts every five years. And just as the changes announced back in 2020 had implications for monetary policy actions over the past five years — the Fed’s language shift, it could be argued, kept the lid on rate hikes even as inflation accelerated in 2021 — so too could the changes Powell announces Friday send ripples for years to come.
“While the adoption of the new framework in 2020 was not the primary factor behind the Fed’s delay and the substantial inflation overshoot, it contributed to this outcome,” said Matt Luzzetti, chief US economist for Deutsche Bank
As a result, Luzzetti expects Powell’s speech to restore a more preemptive strategy for monetary policy, along with recognizing risks of supply shocks and a return to a balanced view of inflation and the job market.
James Fishback, CEO of hedge fund Azoria, argued Powell needs to acknowledge what he calls the “tragic mistake” of average inflation targeting.
Powell noted in his May speech that inflation could be more volatile going forward than in the 2010s and that the US may be entering a period of more frequent, and potentially more persistent, supply shocks.
“The economic environment has changed significantly since 2020, and our review will reflect our assessment of those changes,” Powell said in a speech in May.
Powell also stressed enhancing the Fed’s formal policy communications, particularly regarding the role of forecasts and uncertainty. Investors will watch for whether the Fed rolls out changes to its quarterly Summary of Economic Projections, which contains the famous “dot plot,” a compilation of each member of the FOMC’s expectations for interest rates that year.
Jennifer Schonberger is a veteran financial journalist covering markets, the economy, and investing. At Yahoo Finance she covers the Federal Reserve, Congress, the White House, the Treasury, the SEC, the economy, cryptocurrencies, and the intersection of Washington policy with finance. Follow her on X @Jenniferisms and on Instagram.
