Yves here. While Fed Chair Jerome Powell did not descend to Greenspan levels of bafflegab, he said enough of what people wanted to hear, that a September rate cut might be in the works, while making all sorts of cautionary noises that that still might not happen.
And the real problem for Powell is that the US looks to be heading into stagflation. Even with stimulative fiscal deficits, the last plus revised two prior job reports were weak, but reported inflation is higher than what the Fed likes. And as readers vigorously point out, their personal inflation is much higher than what official data shows. And conditions are not likely to improve. Even though the largest retailers so far seem to be eating a fair bit of tariff costs, smaller fry don’t have the profits to do that, plus the big boy may be doing so as an intended placation of Trump, and will gradually start putting through tariff-related price hikes.
The Fed is not well positioned to remedy stagflation, absent the Volcker remedy of increasing rates so high as to nearly kill the economy stone cold dead. And even that might not work if cost increases are due in no small measure to resource scarcity and tariff-induced supply chain breakage.
By Wolf Richter, editor at Wolf Street. Originally published at Wolf Street
Powell’s speech today at the Jackson Hole conference had two major components: Short-term monetary policy and for the long term, the Fed’s new monetary policy framework.
Monetary Policy: “Shifting Balance of Risks May Warrant Adjusting Our Policy Stance,” but “Carefully.”
Powell made room for a rate cut in September, as “the balance of risks appears to be shifting” to concerns about the labor market.
But it was tempered with lots of concerns about inflation, including his projection that the 12-month core PCE price index for July, to be released in a week, would accelerate further to 2.9%.
Cutting rates as inflation is accelerating is a delicate affair that could spook the bond market and drive up long-term rates – which is precisely what happened in 2024 when the Fed cut by 100 basis points and long-term yields rose by over 100 basis points.
So Powell laid out a scenario of “carefully” nudging down the policy rate, rather than an aggressive series of rate cuts. He said:
“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.
“Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance.
“Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
This “may warrant adjusting our policy stance” was all the market wanted to hear. The text of the speech was released before Powell read it at the conference, and the trading algos reacted to the text instantly, and even before Powell started speaking, stocks jumped and the 10-year yield dropped.
He acknowledged the difficulties for the Fed posed by the mix of weakening labor-market growth and rising inflation.
Part of the labor market equation is the lower supply of labor due to immigration policies. So, “it does not appear that the slowdown in job growth has opened up a large margin of slack in the labor market,” Powell said. This slack in the labor market would show up in higher unemployment rates, for example, but the unemployment rate has remained “historically low” (between 4.0% and 4.2% since May 2024).
He said:
“Labor supply has softened in line with demand, sharply lowering the ‘breakeven’ rate of job creation needed to hold the unemployment rate constant.”
“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 in the form of sharply higher layoffs and rising unemployment.”
But then there was some heavy breathing about inflation:
“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.”
“One possibility is that workers, who see their real incomes decline because of higher prices, demand and get higher wages from employers, setting off adverse wage–price dynamics. Given that the labor market is not particularly tight and faces increasing downside risks, that outcome does not seem likely.”
“Another possibility is that inflation expectations could move up, dragging actual inflation with them. Inflation has been above our target for more than four years and remains a prominent concern for households and businesses.”
“Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.”
Monetary Policy Framework: “Average iInflation” Targeting Is Dead
Over the past months, the Fed conducted an internal review of its monetary policy “framework,” as it vowed to do every five years. This framework is a set of guidelines for the FOMC’s monetary policy decisions. Today, Powell introduced the resulting new “2025 Statement on Longer-Run Goals and Monetary Policy Strategy” that was passed unanimously by the FOMC.
The most important change in the new framework is the elimination of “average inflation” targeting, an odious strategy created in the framework of August 2020, which specified that the Fed would allow inflation to “run moderately above its 2% target” to make up for periods when it ran below the 2% target, to achieve an inflation rate that “averages 2% over time.”
The result of that “average inflation” targeting guideline of August 2020 was the inflation shock.
Inflation began raging at the beginning of 2021, but the Fed continued its near-0% policy and massive QE into early 2022. The Fed didn’t react to raging inflation for 15 months. I called it “the most reckless Fed ever” (google it).
By the time the Fed hiked for the first time in March 2022, bringing its policy rates to 0.25%-0.5%, CPI inflation was already at 8.5%. This was responsible, among other things, for the explosion of home prices (roughly 50% in less than three years), as the Fed’s massive QE, including the purchase of trillions of dollars of MBS, pushed down mortgage rates below 3%, while CPI inflation eventually exceeded 9%. This was the best free money ever. And when money is free, prices no longer matter.
This refusal for 15 months to end these crazed monetary policies of massive QE and near-0% policy rates in face of raging inflation was at least in part brought about by the Fed’s newfangled “average inflation” targeting guideline established in 2020.
In today’s framework, the Fed killed this odious concept of “average inflation” targeting and returned the framework to the previous method of inflation targeting.
Powell said:
“Our revised statement emphasizes our commitment to act forcefully to ensure that longer-term inflation expectations remain well anchored, to the benefit of both sides of our dual mandate.
“It also notes that ‘price stability is essential for a sound and stable economy and supports the well-being of all Americans.’ This theme came through loud and clear at our Fed Listens events. The past five years have been a painful reminder of the hardship that high inflation imposes, especially on those least able to meet the higher costs of necessities.”
Lesson learned.
The 2% target itself remained etched in stone and wasn’t even on the table for the discussions of the new framework, as Powell had said all year during his numerous post-meeting press conferences.
“And as readers vigorously pionEven though the largest retailers […]”
Part of the paragraph was apparently gobbled up by the blog-software editing tool.
Apart from that, it looks as if the FED will attempt a lot of fine-tuning and finessing to escape the contradictory economics forces exerted upon the USA.
Which makes me think: do I remember correctly that central banks set several different interest rates: one for bank reserves, one for short-term overnight lending, one for discounting securities (wasn’t it called the “Lombard rate” in old times?), etc. How much manoeuvering leeway do those different rates provide central banks for adjusting their policies to economic circumstances? Or is arbitrage by financial entities so fast and efficient that all rates must move in unison anyway?
Aargh, why does this keep happening? Fixed.
Probably not your situation, but I had chunks of sentences disappear while writing, and it turned out to be some idiotic programming that had been put into a laptop touchpad. Our young computer gurus think we all want miscellaneous swipe-touch-hover actions built into touchpads just like on phones, preferably undocumented. Merely grazing some bit of the touchpad with a stray finger was enough to erase paragraphs.
That is one setting I have often had reason to find and turn off for relatives who are more used to using the keyboard than fancy trackpad settings, and may rest the hand on the trackpad sometimes.
It can usually be found under trackpad settings, where one can see the settings for one, two, three and even four fingers on the trackpad. Turning everything off but moving around like a mouse pointer, single click for left mouse button and bottom right corner for right mouse button, usually removes a lot of unwanted behaviour.
I do not understand why we’re even talking about lowering interest rates. The stock market is at ATHs, inflation is still a problem, and the “bad” labor market reports still show job growth, albeit at levels not as high as 2024.
But, as you point out, reduced immigration means fewer jobs need to be created to keep up with the growth of the labor force. Perhaps the labor force even shrank?
Powell can talk all he wants, but these are some bad optics. As in, Powell caves to buy himself 7 months of peace before he retires.
we have a bizarro-world, bifurcated economy in which there is too much liquidity for the top 0.5%, but real rates are too high for thr bottom 85% (for a host of reasons).
traditionally, this theorerically could be fixed with fiscal policy. But we have a bipartisan-idiot class that throws $$$$ to the top 0.5% and crumbs sold as birthday cake to the bottom 51%.
I’m scared how far and fast an overly extended market without supporting fundamentals can fall. 😓
So maybe the total failure of the Neocon’s plan to force India to stop buying Russian oil may have been a blessing in disguise. That would have had a chaotic effect on world oil prices as a guess and at the moment, Powell would not welcome having to deal with the blowback in the US over that one.
The usual idea for debtor nations is to wait until the current account balance turns to cut interest rates but with so many tariff shenanigans going on that might be impossible to pick. Like their predecessors in the 70’s they are between a rock and and a hard place.
Have to wait for a couple of inflationary recessions to concentrate minds but the starting debt is a huge millstone. Mr Powell has timed his time in office nicely.
I still believe the ‘Labor Participation Rate’ is a far better indicator than the ‘Unemployment Rate.’
Yes, that would indicate slack but in the post-Covid era, it’s no longer comparable over time. Tons of people are having difficulty with regular work due to Long Covid. And another complicating factor is post-Covid, the % of workers formally classified as disabled has risen markedly, which suggests employers are more willing to be flexible, ie labor markets are pretty tight.
So what is RFK, Jr.’s plan to MAHA?
He has none. He’s just going after pet hobbyhorses of those who can afford to be food purists, like getting rid of certain food additives and creating uptake on snake oil health trackers. Is he doing anything serious about highly processed foods? Having kids exercise? (see how in China teachers lead kids at their desks for 5 mins of vigorous and fun looking upper body exercise). Long Covid?
I vaguely recall when Thomas Ferguson’s paper was posted here in ~ May 2024 that he was going to look at effect of COVID/long-COVID on the labor force. I’m very curious about that. I don’t see anything like that yet at Institute for New Economic Thinking.
But the Trump versus Biden: The Macroeconomics of the Second Coming is there, so I guess I misremembered this being an upcoming topic or it isn’t available yet.
There are a few smaller studies on this, but nothing approach a deep dive from Ferguson.
Long COVID among Essential Workers, Non-Essential
Workers, and Not Working Persons in the United States,
2022-2023: a Cross-Sectional Study
Even The Hill recognized this as an issue in 2022: How long COVID is impacting the nationwide labor shortage
NH did look at this recently: An Estimated 4,000 Granite Staters May Be Out of the Workforce Due to Long-COVID
And the opening sentence is “During the COVID-19 pandemic” (banging head on desk).
So they claim, but the St. Louis Fed data continues to show this is moving up and to the right, albeit janky and not a straight line. Not what I’d call “relatively constant”, although perhaps decelerating a bit.
Oh well.
If you follow Wolf, he does stats ion the labor force. What is interesting is that the labor f9rce has stopped growing.
It may be shrinking from highs
Total Labor force
So Trumps anti immigration policies may be being reflected in the total labor force.
Acknowledging that growing inequality is our main economic challenge simplifies things.
What it suggests, is that, regardless of interest rate fine tuning, inflation on core items like food, housing and energy for the bottom 80-90% of the population will surpass wage growth in the long term.
It will not be a straight line, but it does seem inevitable due to economic reform inertia and our observable trajectory.
I suspect there is an inevitabillity in enduring stagflation emerging as a characteristic of post industrial EU, UK and USA.
The combination of the inherent weaknesses of neoliberal ideology; adverse effects of globalisation; increasing private debt; low wage corporatism plus climate change and falling EROEI cannot really yield any other outcome.
In the UK ONS inflation figures have systematically understated the range and scale of price rises, and impact on the cost of living, and unemployment data has been equally pisspoor.
Given GIGO it is hardly surprising government decision making is incompetent, even ignoring the lingering septic impacts of neoliberal hegemony, that suffuse Reeves’ clique and the Treasury.
From this side of the pond and channel I see little evidence that the situation is any better elsewhere.
Is there a textbook “solution” to stagflation?
From Yves lead-in:
“The Fed is not well positioned to remedy stagflation, absent the Volcker remedy of increasing rates so high as to nearly kill the economy stone cold dead.”
Also, as Yves noted, this is not a solution to broken supply chains, as higher interest rates degrade supply chains, making key infrastructure (machines, concrete, and power) unaffordable to finance. My SWAG is that you need a command economic approach,e.g., the US military during WW2, which would be opposed (effectively) by the US oligarchy.
Well, we’re starting to see a solution similar to that, but so far it looks like the solution is to change the data, not the economy:
Trump fires statistics chief after soft jobs report https://www.politico.com/news/2025/08/01/trump-firing-bureau-labor-statistics-chief-jobs-report-00488960
But not to sell Trump and his team short, they are doing plenty of policy with the tariffs, tax cuts, etc, but so far my take would be that the policies are fashioned by and for the US oligarchy, not in opposition.
“And as readers vigorously point out, their personal inflation is much higher than what official data shows.”
One example: Carlsbad, CA recently raised the trash hauling rate by 15%. And even shopping at places like Trader Joe’s still causes sticker shock.
My cabin insurance went up 304% from last year. You can stick that in the approved ‘we aim for 2% inflation’ mantra 152x.
There are plenty of other reasons why your insurance rate skyrockets other then inflation pressure. Extreme weather being an example. Other insurers leaving your state since they can’t run a profit another.
Further this is an average across the entire population. It never fits a persons situation perfectly.
That said the reasons that inflation is higher then shows in the reports is anything from deliberate under reporting, to abuse of fudge factors (the abuse of hedonistic adjustments being a good example), to deliberately leaving out certain portions of peoples expenses (at least in the reports that are being used for reporting ‘official’ inflation percentages), and so on.
I buy these prepared salads at WinCo supermarket, they’re so good!
3 years ago they were $3.49 and the Chefs Salad to which i’m partial to had a full boiled egg split in 2.
Fast forward to today and they are $4.99 and only half of a boiled egg.
Some things are easy to figure over time when you have a baseline, and most of them don’t cost $4500 a year as my cabin insurance does now, skewing my personal inflation rate in a big way overall.
You always need to add in a time period when you look at prices being raised. Just saying the price of a service/good was raised 15% doesn’t mean anything. Did they raise prices 6 months ago? last year? 2 years ago?
I expect it to be at most 3 years though. Going back further and the your cost for getting your trash hauled would have increased less then official inflation between 2021 and now.
Even with stimulative fiscal deficits,
I still wonder how “stimulative” current deficit spending is for the domestic economy. Since much domestic social spending has been cut, and much of the deficit spending is to support genocide, wars, military and other overseas expenditures, how stimulative can it be? Since much of the dollar rollover ends up in stocks and bonds, maybe it is stimulative only for financial markets?
Also since the DT has reportedly been buying up bonds, could the pressure to lower rates be an unethical conflict of interest and/or abuse of power? The institutional corruption appears to be worsening. https://fortune.com/2025/08/21/trump-bond-buying-spree-100-million-stock-market/
I think that it’s important to look at how low, low rates are still driving the “stag” in stagflation, enabling bubbles blown by the Financial Engineering of stock buy-backs, Secondary Buyouts extending and pretending zombie investments, “related party” investments, Quantitative Easing, etc.
No real investment in production or infrastructure, which have been offshored in favor of labor arbitrage.
Aren’t there trillions of dollars in investment reported to be pledged? That onshoring and net new investment has to have some positive impacts..
It’s obvious that no one is in charge and its complete chaos.
Transitory inflation will last forever and a house will cost
a trillion dollars in 10 years. Time to get shack in the woods
and get lots food and wait for the dark future. There is no
god to save us this time, its end of America.
have a nice day…..
There is no god to save us, it’s the end of human civilization. Have a nice eternity, somewhere, if you can…..say, in a hole in the ground…..