The president of the Federal Reserve, Jerome PowellIt is about to do what your most important speech may be so far – just a few days after one of his colleagues has been threatened with process for alleged mortgage fraud.
Every year, the President of Fed Make an awaited speech in one by the Federal Reserve Bank of Kansas City in Jackson Hole, Wyoming. The event serves to give investors a preview of how monetary policy can develop in the following months.
But this year’s speech has a radically different scenario.
For months, the Fed has been under an unprecedented large -scale attack by the president Donald Trumpwhich not only launched a series of personal insults to Powell and spoke of firing him, who was appointed by former President Joe Biden.
The president’s frustration
The speech will possibly be Powell’s last card, with his term as president ending in May 2026. Treasury Secretary Scott Bessent is already leading the search for Powell’s replacement and the president may announce his choice soon, several months before the end of Powell’s term.
Two current Fed governors – the same ones who broke with Powell – are being considered for the presidency, highlighting the rare division in the Central Bank.
What is happening with interest rates?
Since December, Fed employees have maintained unchanged rates, waiting to see how widespread Trump rates affect prices before resuming cuts in rates, which could stimulate inflation.
So far, Trump’s rates have had a limited impact on inflation (although it remains well above the 2% Fed target), and Fed employees who advocate rates in the rates argue that any increase in prices will be temporary. At the same time, the labor market has shown increasing signs of fragility.
Together, financial markets now see a convincing argument for a cut in interest rates as early as September. But it will not be an easy decision.
“The Fed is really between the cross and the sword now,” said Paul Eitelman, Russell Investments Global Investment Chief of Investment. “I don’t think Powell has enough clarity to strongly signal a cut in September, but he will have to signal risk to full employment.”
“Ultimately, our view is that the Fed will be able to cut interest rates in September,” he added.
Tariff -induced inflation
Most traditional economists although they do not yet know to what extent. But the idea that these price pressures can be short -lived has gained strength among Fed voters.
This is the argument of the two appointed by Trump who disagreed with consensus and supported a cut in the Central Bank’s monetary policy meeting in July-Fed Christopher Waller governor and Fed’s vice president of supervision Michelle Bowman.
The way companies have managed tariffs so far has played a crucial role in maintaining consumer inflation under control for now.
“Even though we are starting to see some pressures accumulate from tariffs and may eventually be passed on, the argument is that they will still be widely temporary adjustments,” said Nationwide-chief economist Kathy Bostjancic.
The latest data actually begins to show that price pressures are increasing at the wholesale level.
The July Producer Price Index, which measures the prices that companies pay to their suppliers, jumped 0.9% over the previous month, raising the annual rate to 3.3%. Both the monthly and annual numbers rose much more than economists expected.
Bowman said in an interview with Bloomberg On Tuesday (19) that still believes that the Fed should cut rates now, despite the July IPP number far above expected.
Powell himself has often pointed out that it is still unclear how persistent the rates induced by tariffs will be – and it may take a long time until it becomes apparent.
“The Fed will not have a clear answer whether it will be a unique change or not even probably next year,” said Garrett Melson, a portfolio strategist at Natixis Investment Managers Solutions. “But they still have to make these decisions.”
The role of the labor market
The job market is the official theme of the Jackson Hole Conference – Demography, Productivity and Macroeconomic Policy.
The average monthly job growth pace from May to July has been weaker than any other three months since 2009, excluding the pandemic recession in 2020. Employment gains this year were also driven by only a few sectors: health, social assistance and local government.
It has also become exceptionally difficult for unemployed Americans to find a job, at least compared to previous years.
In July, the number of unemployed people for more than 26 weeks reached its highest level since December 2021, reaching 1.85 million, although it remains well below the levels of the large recession.
The Fed is not only responsible for controlling inflation, but should also preserve the strength of the labor market. In addition to his visions that tariff inflation can only be temporary, Bowman and Waller also expressed concerns about the labor market. But they are not the only ones among the Fed leaders.
“The labor market has weakened, and I would consider an additional deceleration as undesirable,” wrote Mary Daly, president of the San Francisco Fed, in a publication on LinkedIn last week. “When the job market stumbles, it tends to fall quickly and dramatically.”
Fed leaders have also suggested the possibility that a weaker job market is precisely that would prevent tariff -induced inflation from becoming permanent, as companies will not have so much flexibility to increase prices with more unemployed consumers.
“If you look at pressure on both sides of your mandate, then you are always trying to answer the question: Will the job market make it worse enough to do inflation control work for you?” Said Tom Barkin, president of the Richmond Fed, during a virtual discussion on August 14 organized by the National Association of Business Economy.
Translation revised by André Vasconcelos
