Powell Finally Softens on Rate Cuts — Is a September Cut Now a Done Deal?

At the Jackson Hole central banking conference, Fed Chair Jerome Powell delivered remarks that markets widely took as a dovish signal. He said that with the balance of risks shifting, monetary policy may need some adjustment. That comment immediately fueled bets on a September rate cut: traders lifted the odds from 75% to nearly 90%.

Still, behind all the optimism, there are unresolved issues—divisions inside the Fed, mixed economic data, and political pressures—so a September cut is far from a done deal.

Powell’s Dovish Tone and the Shift in Risk Balance

Powell pointed out that the U.S. economy has held up well under tight policy: the labor market is close to full employment, inflation has come down sharply though still above target. But he stressed that the balance of risks has shifted—short-term inflation risks remain to the upside, while downside risks for jobs are increasing.

That creates a “challenging situation,” requiring more caution in policymaking. He also noted that today’s policy rate is closer to neutral than a year ago, and still restrictive. Importantly, he hinted that the baseline outlook, together with shifting risks, could mean policy needs to adjust.

The Fed also updated its policy framework, moving away from the old heavy focus on the “effective lower bound” and returning to a more flexible inflation-targeting approach—meant to make policy more adaptable.

Markets took all of this as a strong hint of a September rate cut. This was Powell’s first clear dovish signal since the July FOMC meeting. His focus has moved from tariffs fueling inflation to risks that the labor market could weaken, which investors saw as a green light for policy easing.

The Roller-Coaster in September Rate-Cut Odds

Expectations for September have swung back and forth:

• After the July FOMC’s hawkish tone, rate-cut odds sank to their lows.

• Then, weaker-than-expected July CPI pushed odds as high as 94%, with some traders betting on three cuts this year.

• But hotter-than-expected PPI data spoiled the party, and three Fed officials came out strongly against a September cut—knocking odds back to 70%.

• Now, after Powell’s Jackson Hole speech, CME’s FedWatch shows the probability back up around 87%.

Source: CME FedWatch

Job Risks Now Outweigh Inflation

Right now, the U.S. faces both upside risks to inflation and downside risks for employment. Tariffs remain front of mind for the Fed: they’ve already pushed up consumer prices, with core PCE inflation at 2.9%, and the risk could prove sticky.

The labor market is trickier. Hiring slowed over the summer, but the jobless rate is still low. Other measures show modest softening but not severe slack. The latest payrolls report showed just 35,000 jobs per month added over the past three months—far weaker than before, and past data got revised down significantly.

Even though unemployment is still just 4.2%, quits, job openings, and wage growth are all edging down. What’s unusual is that both labor supply and demand have slowed together—immigration restrictions have curbed workforce growth, and participation has fallen. This makes the market fragile: if risks hit, layoffs and rising unemployment could follow quickly.

Source: ForexFactory

Fed Officials Still Divided

Despite Powell’s dovish tone, consensus is lacking inside the Fed. The July meeting minutes showed most policymakers still think inflation risks outweigh labor-market risks. Out of 18 participants, most leaned toward inflation being the bigger threat; only a few thought risks were balanced, and some worried more about jobs.

Two governors—Waller and Bowman—actually dissented at the last meeting, citing job-market concerns.

Regional Fed presidents also reflect the split:

• Cleveland’s Mester (Hawkmann translation) said current data don’t support a cut yet, and tariff effects may not be fully felt until next year.

• Kansas City’s Schmid argued policy is appropriate and shouldn’t change unless data shift clearly.

• Atlanta’s Bostic expects maybe one cut this year but called the outlook highly uncertain.

• Meanwhile, Boston’s Collins suggested that if the jobs outlook weakens, a short-term rate cut might be appropriate, warning against waiting too long.

So even if a September cut happens, the path beyond that is still wide open.

Key Data Before the September Meeting

Before the September 18 FOMC meeting, three big data points could sway decisions:

1. PCE inflation (this Friday) – the Fed’s preferred measure. Stronger than expected could weaken the dovish camp; softer would reinforce cut odds.

2. Nonfarm payrolls (Sept 5) – labor data could highlight either resilience or fragility.

3. CPI (Sept 11) – still crucial for the inflation outlook.

These reports could easily swing the Fed one way or the other.

Source: Trading Economics

Invesight Viewpoint

Powell’s dovish comments gave markets a jolt of confidence, pushing September cut odds close to 90%. But nothing is locked in. The Fed is divided, data are sending mixed signals, and politics loom in the background.

Inflation has ticked up slightly again, while the labor market looks steady on the surface but fragile underneath. And with more data coming before the meeting, sentiment could turn quickly if inflation surprises to the upside.

Bottom line: September is leaning dovish, but the decision—and what happens after—still depends heavily on the incoming numbers.