The Fed may cut rates by 0.25% this week

Fed Chair Powell appeared to almost pre-commit the Fed to a cut in rates at his Jackson Hole conference speech last month. Given that FOMC members have been predicting lower rates all this year, there seems to be nothing controversial in what the Fed seems likely to do with rates tomorrow. However, there is controversy, and this could have a bearing on how financial markets react to this cut and the ones that will likely follow.

If we had to pinpoint reasons why Powell seemed to almost pre-commit to a rate cut in his Jackson Hole speech, we’d point to three factors.

The first is that Powell seems to like flagging future policy changes at the Jackson Hole symposium.

The second is that the US economy is more deserving of lower rates given the weakening of the US labour market and muted impact of tariffs on inflation.

The third is the political pressure coming from the White House, not just for rate cuts, but for big rate cuts.

If we look at these in turn, the significance of these Jackson Hole speeches for future monetary policy does seem to have increased since Powell took over as Fed Chair. This is not to say that the symposium was uninteresting before Powell took the Fed Chair. The difference in the Standard Bank’s view is that prior Fed Chair’s have often used the Jackson Hole gathering to make what we might call more semi-academic speeches that might not have always covered future monetary policy. Powell, by contrast, is not a trained economist and hence has eschewed these more academic debates in favor of a clear discussion about the outlook for monetary policy most of the time.

As a result, Powell may see the significance of his comments, not in terms of throwing some new light on a subject, as former Fed Chair Bernanke did with his ‘savings glut’ speech in 2005, but as a guide, or even a pre-commitment, to future monetary policy. Clearly Powell can’t do this every year, but he did in 2024 and 2025 looks like being a repeat.

Is this a ‘good’ reason to change policy? Probably not. But clearly it does not come about in a vacuum. The US economic situation has to justify a policy change, and the Fed clearly seems to think that it does right now. Powell elucidated this at the symposium and the subsequent downward revisions to employment after Powell’s speech seem to have set the seal on a rate cut this week. In addition, the increase in inflation since the introduction of tariffs has been more modest than anticipated, and there are clear signs that the Fed is minded to look through any price rise given the one-off nature of tariff-related price pressure.

We can certainly see the economic justification for a likely rate cut tomorrow. However, the data tend to suggest to us that this will be more of an ‘insurance’ type of rate cut as the Fed gently leans into the weakness in employment to try to ensure that nascent vulnerability here does not become significant and entrenched.

In short, the economic motivation and any Jackson Hole-related justification speak to a modest 25-bps rate cut, with FOMC members probably still only forecasting one further rate cut this year. But into this mix comes the third factor at play here; politics. This reflects the politics of those on the FOMC who feel that they might be in with a chance of getting Powell’s job (Waller and Bowman), and incoming member Miran who is also in the frame. The ‘politics’ also reflects the way that Fed Chair Powell may try to play the policy game as he accepts that the independence of the Fed could really be at stake if rates are left unchanged. Now this is not to say that Powell would endorse a rate cut without any supportive economic justification. But, at the margin, we dare say that Powell and many others on the Fed are more minded to ease policy given the political backdrop.

Is this a good reason to cut rates? Again, not in the Standard Bank’s view. In all, the Fed may be about to restart its easing cycle but the ability of rate cuts to instill confidence in policymaking is limited. In fact, they are more likely to do the opposite, and, in our book that means a weaker dollar and higher yields.