Lower interest rates as early as September: Fed Chairman Jerome Powell gives in to Donald Trump's pressure

It was likely his last major keynote speech. Jerome Powell will step down as Fed chair in May 2026. On Friday, he once again shook up the financial markets at Jackson Hole, the annual gathering of central bankers.

Powell hinted that the Fed could expect a rate cut in September. The markets rejoiced: The S&P 500 stock index rose by 1 percent when the Fed released Powell's speech. At the same time, prices for US Treasury bonds rose sharply across all maturities. Their yields, which move inversely with price, fell significantly.

Powell's concession could defuse a simmering conflict with the White House: President Donald Trump has been urging the Fed to lower interest rates since taking office. However, the central bank waited because it wanted to get inflation under control first.

In addition, the Fed chairman also announced new guidelines on Friday regarding how the world's most important central bank will conduct its monetary policy from now on. These changes are likely to lead to somewhat tighter monetary policy in the medium to long term—and could reignite the conflict with Trump.

For decades, the industry's leading minds have been discussing their long-term monetary policy at the remote Wyoming resort. The Fed chairman's appearance typically marks the highlight of the meeting. Powell's speech was particularly eagerly anticipated this year for several reasons.

First, the Fed is engaged in an intense power struggle with the White House. Trump is putting increasing pressure on Powell and other Fed governors to lower interest rates and stimulate the economy. For a long time, the president channeled his anger at the Fed chairman, but now he's increasingly directing it at other key figures.

On Friday, shortly after Powell's speech, Trump announced that he intended to dismiss Fed Governor Lisa Cook early if she did not leave her post voluntarily – even though Cook's term of office does not end until 2038.

Cook has been accused by a Trump aide in the administration of making false statements when taking out two mortgages. The White House has already leveled similar accusations against a California politician and the New York attorney general, both of whom the president counts among his opponents. In this respect, the allegations give the impression that Trump is trying to create a threatening atmosphere against an unpopular Fed governor who was appointed by his predecessor, Joe Biden, and who has since consistently voted in line with Fed Chairman Powell.

In any case, Trump applies a much stricter standard to Cook than to his allies—or to himself. In 2023, a court found that the president had fraudulently misvalued his real estate and other assets for years in order to strengthen his family business.

The Fed is not only struggling with political pressure, but also with the economic situation. Inflation has risen again, while the labor market is showing increasing weakness. This presents a difficult situation for the Fed: High and rising inflation actually requires a restrictive monetary policy and high key interest rates; the labor market, on the other hand, needs to be supported with lower interest rates.

Shortly before Powell's speech, investors expected the Fed to place a higher emphasis on labor market risks, but they were no longer entirely certain. According to data from the CME Group's futures market, a good 75 percent of investors expected an interest rate cut as early as September . A week ago, the figure was more than 90 percent.

It's becoming apparent that, with a delay, Trump's tariff strategy could still lead to a sharp price spike, jeopardizing the Fed's efforts to combat inflation. On Thursday morning, for example, Walmart CEO Doug McMillon said that price pressure is steadily increasing.

Many retailers had stocked up on foreign goods before Trump's tariffs went into effect. However, they have since sold their inventory of cheap products – and must restock at higher prices. Other retailers and wholesalers also admit that they cannot completely avoid price increases. This applies, for example, to the home improvement and DIY retailer Home Depot, which announced just three months ago that it would forgo widespread price increases in order to gain market share.

Until recently, there was no consensus within the Fed as to whether this tariff-induced price spike would be a one-off or whether it would lead to Americans raising their long-term inflation expectations. The latter, from the Fed's perspective, would be a dangerous prospect, one that the Fed would have to combat with persistently high key interest rates.

In his speech on Friday, Powell emphasized for the first time that the Fed's baseline scenario assumes only a one-time surge in prices and that it currently considers the risks to the labor market to be more problematic. Powell spoke of a "strange kind of equilibrium" in the labor market: On the one hand, demand for labor is declining. However, because fewer workers are available due to declining immigration, the unemployment rate remains low.

Powell emphasized that this is not a stable equilibrium. If conditions deteriorate, it could quickly lead to more layoffs and higher unemployment.

In addition, Powell announced a longer-term adjustment of monetary policy. This was expected. The Fed last adjusted these guidelines in 2020, loosening monetary policy in the process. The Fed wanted to allow inflation to exceed the 2 percent target if it had previously been below this level for a long time. This was an asymmetric rule: The Fed was unwilling to accept an undershoot of the target after a wave of inflation.

The Fed thus adapted to the unique monetary environment of the 2010s, when Western central banks were able to keep their key interest rates ultra-low for extended periods without leading to high inflation.

But that time is over. In 2021 and 2022, the Fed underestimated how strong and persistent the price surge would be as the pandemic subsided. In June 2022, inflation in the US reached 9.1 percent. To combat it, the Fed raised its key interest rate to over 5 percent. Today, it still stands at 4.25 to 4.5 percent.

Then came the next surprise: The American economy coped surprisingly well with the high interest rate environment. Many experts concluded that the neutral interest rate—that is, the interest rate that neither stimulates nor slows the economy—is higher than it was a decade ago. Powell also emphasized this on Friday, citing demographics, labor productivity, and fiscal policy as possible causes.

Against this backdrop, the Fed is adjusting its monetary policy guidelines. It is removing the one-sided focus on problems arising from an ultra-low interest rate environment and reaffirming that the goal of full employment can only be sustainably achieved in an environment of stable prices. Most notably, the central bank is reversing its strategy of tolerating an overshoot of the 2 percent inflation target if inflation had previously been below the target.

These adjustments may seem small and insignificant at first glance. However, they demonstrate that the Fed is preparing for a world of higher interest rates in the medium to long term. The central bank will therefore tend to pursue a tighter monetary policy in the future, even if that doesn't appeal to Donald Trump.

The president recently called for an ultra-low key interest rate of between 1 and 2 percent, while not giving the impression that he's interested in changing the neutral interest rate. There's a good chance that a dispute between Trump and the Fed leadership will arise again in the future – but that it will be Powell's successor who will have to fight it out.