Jerome Powell Warns of Stagflation Risks
Federal Reserve Chairman Jerome Powell raised concerns about a heightened risk of stagflation during his final keynote speech at the annual Jackson Hole Gathering. While he acknowledged potential interest rate cuts as soon as September, he emphasized the need for caution.
In his remarks, Powell referenced shifts in tax, trade, and immigration policies, noting that the “balance of risk appears to be changing.” The overall resilience of the economy and labor market remains, but he highlighted rising negative risks, such as tariffs that could exacerbate inflation.
Despite these challenges, Powell mentioned that the present economic climate allows for a cautious review of policy adjustments. As policies are currently constrained, he indicated that the balance between the base outlook and evolving risks might necessitate a reassessment of policy attitudes.
This outlook contributed to a significant boost in the Dow Jones industrial average, which surged by 679 points (1.5%) shortly after his remarks, hinting at a potential slowdown in rate hikes.
According to CME Fedwatch, there’s a roughly 75% probability that the Fed will reduce rates by a quarter point soon after Powell’s speech. Since December, the central bank has maintained interest rates in the range of 4.25% to 4.5%.
Powell also made comments about the Fed’s efforts to uphold its independence, especially in light of pressure from President Trump. He stated, “FOMC members make these decisions based solely on the assessment of data and the impact on the balance of economic outlook and risk. We will not deviate from that approach.”
Trump has been vocal about lowering interest rates, expressing a desire for cuts of up to three percentage points, and has criticized Powell in the process. Although Trump considered replacing Powell, he recently visited the site of the central bank’s $2.5 billion headquarters renovation, questioning the project’s costs.
This week, it was reported that the Justice Department has initiated an investigation into Fed Governor Lisa Cook regarding alleged mortgage fraud, a day after Trump called for Biden’s appointees to resign.
The Trump administration has maintained that tariffs do not cause long-term inflation. However, Powell argued that the impacts of tariffs might take time to fully reflect through supply chains and distribution networks, suggesting that the adjustment process could extend further.
