Powell Opens the Door to Cuts, Not a Rate Move

Powell Opens the Door to Cuts, Not a Rate Move — Markets Rally After Fed Chair’s Jackson Hole Pivot

The Federal Reserve did not change its policy rate on Aug. 22, 2025, but Chair Jerome Powell used a high-profile speech at the Fed’s Jackson Hole symposium to signal a meaningful shift in the central bank’s posture: he opened the door to an interest-rate cut as soon as the Fed’s September meeting and announced an update to the Fed’s long-run monetary policy framework. Markets rallied strongly on the news, with U.S. equities jumping and Treasury yields tumbling as investors priced in a high probability of easing next month.

What Powell said (and didn’t say)

Powell framed his remarks as an adjustment to the Fed’s longer-run strategy and a cautious recalibration of near-term guidance. He said that with policy now sitting in “restrictive territory,” the evolving balance of risks — notably signs of cooling in the labor market — “may warrant adjusting our policy stance,” and that the Fed’s baseline outlook could make a rate cut appropriate next month if incoming data support it. He stopped short of a firm commitment, repeatedly stressing that any change would be “data-dependent” and that inflation risks remain.

At the same time, the Fed released an amended Statement on Longer-Run Goals and Monetary Policy Strategy, removing language tied to the prior “makeup” approach and returning explicitly to a flexible inflation-targeting framework. The updated framework signals the Fed’s intent to prioritize keeping longer-run inflation expectations well anchored while retaining a data-driven approach to employment and price stability.

Markets: stocks leap, yields fall, traders ramp up bets on September

Financial markets responded quickly. U.S. equity indexes closed sharply higher: the Dow posted a multi-hundred point gain (a record close according to some reports), the S&P 500 and Nasdaq also rose more than 1%, while the Russell 2000 outperformed. Treasury yields fell across the curve — two-year yields, which are highly sensitive to Fed policy expectations, moved lower — and the dollar weakened. Reuters, Bloomberg and the Associated Press described the moves as a clear “Powell-driven” rally that pushed markets to re-price near-term Fed easing. Traders at CME’s FedWatch and other pricing tools pushed the odds of a September rate cut sharply higher — Reuters cited traders seeing a near-90% chance of a reduction next month.

Why the Fed shifted its language

Powell framed the framework changes as a response to a changed economic landscape: elevated structural fiscal pressures, the legacy of rapid post-pandemic inflation, and what he described as a “curious balance” in the labor market that could deteriorate faster than expected. By removing the “makeup” language, the Fed signaled less tolerance for a strategy of deliberately overshooting inflation to make up for past shortfalls — an approach adopted in the pandemic era — and more focus on keeping inflation expectations anchored. 

Political and market context

Powell’s speech came amid heightened political pressure on the Fed and mixed recent economic data: inflation has eased from post-pandemic highs but remains above target in some measures, and labor market indicators have softened modestly. President Trump and other political figures have criticized Fed policy and urged quicker cuts; Powell acknowledged the political noise implicitly by emphasizing independence and data-driven decision-making. Markets seized on the dovish elements of Powell’s remarks while also betting that the Fed will be cautious and gradual in any easing.

What to watch next

1. August economic data — inflation readings, retail sales and labor data due before the Sep. FOMC meeting will determine whether Powell’s “door-open” language becomes an actual rate cut.

2. Fed communications — minutes from the next FOMC meeting and speeches from other Fed officials will clarify whether Powell’s signal reflects a consensus.

3. Market volatility — a strong re-pricing toward cuts raises the risk of an abrupt reversal if incoming data disappoint.

Analysis

Powell pulled off a classic central-banker balancing act: he gave markets enough to cheer — a credible path toward easing — without tipping his hand to a commitment that could undermine the Fed’s anti-inflation credibility. That’s smart central banking, but it also carries risks.

On one hand, signaling a possible September cut calms markets and gives the Fed optionality to respond to a cooling labor market without appearing reactive. It lowers the near-term odds of a policy-induced recession by easing financial conditions and boosting risk assets. On the other hand, investors may be guilty of overcelebration: the Fed emphasized “data dependence” repeatedly — if inflation re-asserts itself or wage dynamics stay resilient, the Fed will have to hold rates longer, and markets could quickly unwind the gains seen Friday.

Politically, Powell also aimed to re-center the Fed’s institutional narrative. By revising the long-run framework, he signaled a return to a more conventional inflation-anchoring stance — a move that may soothe both markets anxious for predictability and critics worried about policy drift. But credibility is a two-way street: future action must match word. If the Fed signals flexibility and then reverses course, it will reduce confidence in future guidance.

In short: Friday’s speech bought the Fed breathing room and gave markets a reason to rally — but it didn’t resolve the underlying policy trade-offs. The real test comes in the data between now and the September meeting: if the labor market softens further and inflation continues to ease, Powell’s door may open to a cut. If not, investors will discover that an “open door” is not the same as an invitation.