Federal Reserve Chair Jerome Powell used his annual Jackson Hole keynote speech to paint a picture of an economy facing policy-driven headwinds and rising uncertainty. He pointed to sharply higher tariffs "across our trading partners" that are reshaping global commerce, and to tighter immigration rules that have abruptly slowed labor-force growth.
Over a longer time horizon, Powell added, shifts in tax, spending, and regulation could weigh on productivity -- yet no one knows where these policies will land or what their lasting effects will be. The throughline was caution, as multiple shocks are hitting both demand and supply, and the Fed can't easily offset structural changes.
Powell's economic diagnosis leaned unambiguously downbeat. Payroll growth has faded dramatically -- averaging roughly 35,000 a month over the past three months after substantial downward revisions -- while the jobless rate has ticked up to about 4.2%. That's not a recession call, but it is a marked slowdown from 2024's pace, and a signal that the labor market is losing steam for reasons that include immigration-driven supply frictions. In tandem, tariff pass-through is lifting certain goods prices, complicating the inflation picture just as growth cools.
That mix of softer growth with pockets of price pressure is exactly the kind of cross-current that forces a central bank to weigh its dual mandate. Powell made clear that the Fed sees upside risks to inflation but downside risks to employment, and that policy is already restrictive. Notably, he said the policy rate now sits about 100 basis points closer to neutral than a year ago and that officials can "proceed carefully" as they consider adjustments. Translation: if the labor data keep weakening, the bar to ease isn't high.
Markets heard the hint. Following the speech, investors leaned into bets that rate cuts could begin soon, and major indexes rallied on the idea that policy relief is at hand -- even as inflation is still hovering above the central bank's target. This is the classic "bad news is good news" moment: a darker macro backdrop nudges the Fed toward lower rates, which can buoy equity valuations in the short run by reducing discount rates and supporting multiples. News coverage captured that reaction, with odds of a near-term cut rising and stocks finishing higher on the day.