Jerome Powell used his keynote speech at Jackson Hole to prepare the market for a pivotal shift in monetary policy. The speech marked the end of the post-pandemic FAIT framework and the beginning of a new phase focused on “preemptive” measures to guard against economic slowdown. The door is now wide open for rate cuts to begin, with September firmly in view.
Federal Reserve Chair Jerome Powell used his keynote address at the Jackson Hole Economic Symposium to strongly signal that the central bank is preparing to cut interest rates as early as next month, citing a shifting balance of economic risks. In what may be his final speech at the high-profile forum, Powell indicated that rising concerns over the labor market now justify a move away from the Fed’s restrictive policy stance.
Powell also unveiled a significant shift in the Fed’s fundamental approach to inflation targeting. The strategy of Flexible Average Inflation Targeting (FAIT), adopted in 2020, has been officially set aside. This framework was designed to tolerate periods of above-target inflation to make up for periods of weakness. However, Powell stated that this model no longer seems suitable following a prolonged stretch of inflation consistently exceeding the Fed’s 2% goal.
A critical change in language centered on the word “preemptive.” The Fed has now retired its previous stance of avoiding preemptive action against inflation for fear of harming employment. Powell explicitly stated that the central bank would now act preemptively if labor market tightness threatens price stability. This new forward-looking posture was a key takeaway for Wall Street, immediately impacting market forecasts.
Following the speech, financial markets rapidly adjusted their expectations. The probability of a quarter-point rate cut at the September meeting surged to over 90%. Bond yields fell sharply in response, with the 10-year Treasury yield dropping and the more policy-sensitive 2-year yield falling even further. Traders now overwhelmingly anticipate at least two rate cuts before the end of the year.
While addressing potential upside risks to inflation, such as those posed by trade tariffs, Powell characterized such scenarios as unlikely. This assessment forms part of the Fed’s baseline outlook, which continues to support the argument for beginning a cycle of rate reductions to ensure a soft landing for the economy.
