Powell's Farewell Jackson Hole Speech Clears the Path for Further Rate Cuts

Nearly 50 years ago, the Jackson Hole Symposium began as a modest regional gathering of economists. At the time, the U.S. was battling double-digit inflation, and few could have imagined that this Wyoming retreat would grow into the world’s most closely watched stage for central banking. Over the decades, it has become the venue where monetary policy pivots are unveiled, legacies are defined, and global markets hang on every word.

One of the most defining early moments came in 1982, when Federal Reserve Chair Paul Volcker used the symposium to reaffirm a principle that still guides monetary policy today: price stability is the foundation of sustainable growth, and it requires a credible, independent Federal Reserve (Fed). Years later, Ben Bernanke and European Central Bank President Mario Draghi cemented quantitative easing as a permanent tool in the post-financial-crisis era, reshaping how central banks respond to downturns.

Fast forward to 2024, when Jerome Powell stood at Jackson Hole to signal that after more than a year of restrictive policy, the Fed was ready to adjust. A jumbo rate cut followed, sparking expectations of an aggressive easing cycle. Yet the economy proved more resilient than anticipated, forcing the Fed to pause. That lesson shaped the cautious tone throughout much of 2025; inflation was easing, but tariffs and a still-solid labour market kept the Fed from rushing into cuts.

By the lead-up to this year’s symposium, markets were betting on two cuts by year-end and a terminal rate near 3%. The catalyst was weak labour data: job creation had slowed sharply, averaging just 35,000 per month after major revisions. Still, some Fed officials stressed that unemployment remained historically low, hinting at no urgency.

At Jackson Hole, Powell settled the debate. He confirmed that rate cuts are coming, likely starting in September, and struck a noticeably dovish tone compared to July. Acknowledging the softer job numbers, he warned of “downside risks” to employment—risks the Fed is keen to avoid. While he reiterated that tariffs are a “one-time” price shock, he emphasized patience, noting that “one-time does not mean all at once.” Importantly, he dismissed fears of a wage-price spiral, pointing to cooling labour conditions.

This was also Powell’s final Jackson Hole speech as Fed Chair. Unlike some predecessors who used their last remarks to defend their record, Powell chose to announce a major update to the Fed’s long-term strategy framework. The last revision, in 2020, introduced flexible average inflation targeting in response to chronically low inflation. This time, the Fed reversed course:

• The language on the zero lower bound—a hallmark of the post-crisis era—was dropped.
• The average inflation targeting framework was scrapped, replaced with a symmetric 2% goal.
• The focus on mitigating “shortfalls” from employment was pared back, now framed more broadly as promoting maximum employment.

These changes may not affect policy in the immediate term, but symbolically they mark a clean departure from a framework geared to deal with the low-rate, low-inflation mindset that dominated the last decade, to one with more symmetric risks.

Looking forward, markets expect around five more cuts over the next year, bringing policy closer to neutral. Such pricing is justified given slowing economic activity, downside risks to employment and a base case of temporary tariff-related inflation. The pace of easing will be determined by incoming data, and labour market indicators will be crucial to watch. The Fed’s reaction function has shifted: inflation concerns are secondary, while unemployment risks are front and center. That makes policy clearly asymmetric to the dovish side—the Fed is more likely to cut if the economy weakens—and has ample room to do so, than to hike if inflation blips higher.

Yet beyond the Jackson Hole Symposium, a bigger risk looms: politics. The Fed has withstood political pressure for over 70 years, preserving its independence as the cornerstone of monetary and financial stability. But today, that independence feels more fragile. Should policy rates be lowered for political reasons, history suggests the outcome would be higher entrenched inflation, weaker credibility and higher long-term yields. It is still a tail risk at the moment but one that should be watched very closely.