At the annual Federal Reserve Symposium organised in Jackson Hole in Wyoming, Fed Chair Jay Powell signalled that the balance of risk is shifting towards weaker employment and away from higher inflation, paving the way for a rate cut to take place in mid-September. This is because “the labour market is not particularly tight and faces increasing downside risks,” while inflation remains not far from the Fed’s 2% target (it was 2.7% in July) and the shock deriving from newly-introduced tariffs is likely to be a one-off price-level adjustment.

This is not massively surprising to us, since we have predicted a rate cut in September since last spring, and the economy has evolved not particularly differently from what we expected. But the market reacted very positively to the news. As the Financial Times reported, the probability of a rate cut in September increased from 75% to 81% after Powell’s speech, hence “the yield on the two-year Treasury note, which is sensitive to expectations for monetary policy, dropped 0.1 percentage points to 3.69 per cent. Wall Street’s S&P 500 share index jumped 1.5 per cent. The dollar dropped about 0.9 per cent against a basket of half a dozen peers.”

What caused this shift in the Fed’s stance? There are a series of factors that have done so. First, the “deals” made by the US and some of its major trading partners (the EU, Japan, Canada, Switzerland, India, etc.) have reduced some of the uncertainty surrounding the tariff policy of the US administration. While some interim deals, for example that with the EU and Switzerland, have ended with higher-than-expected tariff rates (15% and 39% respectively), on average the worst case scenarios, such as a 135% tariff on China, have not materialised yet. So, the Fed seems now more confident that the overall inflation shock from tariffs will be more contained than was initially feared.

Second, months of policy uncertainty have reduced economic activity globally, and the US is not immune from that reduction, with the latest employment figures being more subdued than when Trump took office. This actually caused the firing of the Bureau of Labor Statistics commissioner Erika McEntarfer, as we discussed a couple of weeks ago. So the Fed is now looking more at the employment side of its dual mandate as a result, rather than at inflation.

Third, in July, two FOMC members (Michelle Bowman and Christopher Waller – both touted to become the next Fed Chair) have already voted in favour of a rate cut. The last time two dissenters emerged in the FOMC was in 2020; more than five years ago. After the resignation of Adriane Kluger (as a protest for the firing of McEntarfer), Trump nominated his loyal advisor Steve Miran to replace Kluger. If the Senate swiftly confirms this appointment, Miran could take part in the FOMC meeting in September, with the serious risk of a third dissenter emerging in the FOMC. This would look more like a revolt against the Chair than just a dissent. So Powell may try to prevent this event from happening, while remaining in control of the process, instead of being forced into it.

Fourth, Trump recently asked for the resignation of Board of Governors member Lisa Cook, after a US housing regulator accused her of mortgage irregularities. While she said that she won’t be “bullied into resigning”, clearly pressures are mounting on FOMC members and the Fed as a whole. This was reinforced by the recent decisions made by the Administration to place much more weight on the Treasury than the Fed regarding digital asset regulation.

So, while the Fed – as of today – remains the only independent policy agency remaining      in the country, the pressure from Trump has started to filter through, and the Fed may soon change its stance.