- Powell warned “downside risks to employment are rising,” as job growth drops to just 35,000 per month.
- Tariffs are lifting prices, but Powell called the inflation impact a “one-time shift,” not a lasting threat.
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Federal Reserve Chair Jerome Powell used his Jackson Hole speech to strike a surprisingly dovish tone, warning that downside risks to the U.S. labor market are rising and that monetary policy "may warrant adjusting" if the economic slowdown deepens.
Many economists had expected Powell to avoid any hint of a rate cut, instead reiterating the Fed's wait-and-see stance. Instead, Powell's speech delivered a clear signal: the Fed's focus is shifting from inflation toward mounting risks to jobs and growth.
"The situation suggests downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment," Powell said on Friday.
It's a notable departure from the Powell of last year, when inflation was public enemy number one.
‘Downside Risks To The Labor Market Are Rising’
Job growth has sharply decelerated to just 35,000 per month over the past three months, down from 168,000 per month in 2024, with recent months subject to significant downward revisions.
Powell described the current labor balance as "curious," since both hiring demand and labor supply have weakened in parallel, leaving the labor market vulnerable to sudden shocks.
The unemployment rate edged up to 4.2% in July, and labor force participation has declined amid tighter immigration policies and demographic constraints.
GDP Growth Slowing As Consumer Spending Fades
Economic growth is losing steam. Powell noted that GDP growth slowed to 1.2% annualized in the first half of 2025, roughly half the 2.5% rate in 2024. This downshift has stemmed mainly from cooling consumer spending, traditionally the backbone of the U.S. economy.
Against this backdrop, Powell’s tone marked a clear pivot: "With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance."
That's the clearest acknowledgment yet that future rate cuts are possible if job losses accelerate or the slowdown deepens.
Tariffs Pushing Up Prices, But Fed Sees Limited Inflation Threat
On inflation, Powell said the effects of tariffs are "now clearly visible" in consumer prices, with further impact expected in the coming months. Headline Personal Consumption Expenditure inflation rose 2.6% in July year over year, while core PCE came in at 2.9%.
Despite that, Powell said these price increases are likely to be temporary, describing them as a "one-time shift in the price level".
He dismissed the risk of a sustained wage-price spiral, citing a cooling labor market and stable long-term inflation expectations.
The Fed chair warned that if households and businesses start to believe higher inflation is permanent, it could feed back into real inflation. But for now, "that outcome does not seem likely," he said.
"Monetary policy is not on a preset course," Powell stressed, saying the Federal Open Market Committee (FOMC) will respond to incoming data.
The next key inputs will be the August jobs report (Sept. 5) and the CPI/PPI inflation data (Sept. 10–11) ahead of the Sept. 17 Fed meeting.
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