By Howard Schneider and Ann Saphir
JACKSON HOLE, Wyoming (Reuters) -Federal Reserve Chair Jerome Powell on Friday signaled a possible interest rate cut at the U.S. central bank’s meeting next month, saying that risks to the job market were rising but also noting inflation remained a threat and that a decision wasn’t set in stone.
While his comments were not as explicit as those previewing rate cuts following last year’s Jackson Hole conference, investors quickly bumped up bets that the Fed will reduce its policy rate by a quarter of a percentage point at its September 16-17 meeting.
Several Wall Street analysts alerted clients they were tearing up prior forecasts for the Fed to wait until December to cut rates and now expected reductions totaling half a percentage point by the end of the year, from the current 4.25%-4.50% range.
“The stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance,” Powell told international economists and policymakers at the Fed’s annual conference in Wyoming. “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
Powell’s comments put heavy weight on the next monthly employment report, due September 5, and inflation reports due the following week. The most recent job-market report showed monthly payroll gains had plummeted to a monthly average of 35,000 in the July to May period, though the unemployment rate was a still-low 4.2%.
“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. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly,” the Fed chief said, noting that while tariffs are expected to drive prices higher, the baseline case is for their impact on inflation to fade.
“It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed.”
U.S. stocks rose after the remarks, and traders assigned about an 85% probability that the Fed would deliver a quarter-percentage-point rate cut next month, up from about 75% earlier in the day. Market bets also strongly favor a second rate cut in December. U.S. Treasury yields dropped and the dollar slid.
“Chair Powell came in more dovish than expected,” said Thomas Hayes, chairman of Great Hill Capital LLC. “He has set the table to move in September.”