Fed Chair Powell says inflation, hiring slowdown pose 'challenging situation'
Federal Reserve Chair Jerome Powell on Friday said the central bank faces a "challenging situation" as a hiring slowdown coincides with tariff-driven price increases, putting pressure on both sides of the Fed's dual mission to maximize employment and control inflation.
Speaking at an annual gathering in Jackson Hole, Wyoming, Powell said "the effects of tariffs on consumer prices are now clearly visible." He added that the Fed expects those price increases to "accumulate over the coming months."
Still, Powell said, the "balance of risks appears to shifting" in light of a hiring slowdown made clear in a weak jobs report earlier this year that included sharp downward revisions of job gains over recent months.
Powell said the Fed would "proceed carefully" but he hinted at the possibility of a change to interest rates, saying "the shifting balance of risks may warrant adjusting our policy stance."
Futures markets appeared to interpret Powell's speech as an indication that the Fed would cut interest rates at its next meeting in September. Minutes after the speech, investors pegged the chances of a quarter-point interest rate cut at 91%, up from a 75% chance assessed one day earlier, according to CME FedWatch Tool, a measure of market sentiment.
Stocks rallied after Powell's remarks. The Dow Jones Industrial Average soared nearly 800 points, or 1.7%, while the S&P 500 jumped 1.4%. The tech-heavy Nasdaq climbed 1.7%.
For months, President Donald Trump has urged the Fed to lower interest rates in an effort to boost economic performance and reduce interest payments on government debt. So far, the Fed has refused, opting to hold interest rates steady as policymakers observe the effects of tariffs.
Trump ratcheted up his pressure campaign this week, calling on Fed Governor Lisa Cook to resign after a Trump administration official alleged that she had committed mortgage fraud. Cook rebuked the push for her to quit, saying she has “no intention of being bullied to step down from my position because of some questions raised in a tweet.”
The political clash has coincided with a fraught moment for the central bank.
Hiring slowed sharply in recent months, threatening to undermine a part of the Fed’s mission devoted to maximizing employment. At the same time, a measure of underlying inflation has picked up, putting at risk the central bank’s effort to control price increases.
Policymakers face a bind. If the Fed raises interest rates as a means of protecting against tariff-induced inflation, it risks tipping the economy into a downturn. On the other hand, if the Fed lowers rates to stimulate the economy in the face of a potential slowdown, it threatens to boost spending and worsen inflation.
"When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate," Powell said, acknowledging the difficult choices faced by policymakers.
Five meetings and eight months have elapsed since the Fed last adjusted interest rates. The federal funds rate stands between 4.25% and 4.5%, preserving much of a sharp increase imposed in response to a pandemic-era bout of inflation.
On Friday, Powell reiterated the central bank's view that tariffs have already begun to push up some consumer prices. But, he added, central bankers are primarily focused on the question of whether these price hikes will create an "ongoing inflation problem."
The prospect of persistent inflation remains unclear, Powell said, but the Fed must take into account the possibility of enduring price increases as it weighs the level of interest rates.
The speech on Friday marked the first public remarks from Powell since the weak jobs report, offering him a chance to inform onlookers about whether he remains primarily concerned about inflation or employment. Powell appeared to signal concern about both sides of the Fed's dual mandate.
In his speech at Jackson Hole, Powell did not appear to address pressure from the Trump administration.
In recent weeks, Trump has slammed Powell over cost overruns tied to the central bank’s $2.5 billion building renovation project.
The Fed attributes spending overruns to unforeseen cost increases, saying that its building renovation will ultimately "reduce costs over time by allowing the Board to consolidate most of its operations," according to the central bank's website.
Federal law allows the president to remove the Fed chair for "cause," though no president has ever done so. Powell's term as chair is set to expire in May 2026.
At the press conference last month, Powell advocated for the independence of the Federal Reserve.
Political independence, Powell said, gives central bankers the "ability to make these very challenging decisions in ways that are focused on the data, the evolving outlook, the balance of risks – and not on political factors."
