Unlock the Editor’s Digest for free
Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
The latest central banker get-together in the wilds of Wyoming laid out rather neatly the dilemma facing the most influential policymakers in financial markets and the Maga rejig heading their way.
Bright and early local time in Jackson Hole, Federal Reserve chair Jay Powell took to the podium to deliver what will almost certainly be his last speech in this role at the Fed’s annual set-piece event.
It was, as you would expect from a serious speech by a serious person, a tightly-crafted and thoughtful affair — a careful articulation of the challenges the Fed is facing: a droopy jobs market that calls for interest rate cuts but a still-live threat of a pick-up in inflation that the central bank is loath to tolerate. This will be a tricky situation for his successor, whoever that is, to navigate, when Powell leaves his current role next May.
For now, though, the Fed chair is clearly more convinced by the employment side of that equation, indicating that “adjustment” may be necessary — a big hint that the central bank is poised to restart cuts in interest rates next month
This was itself a surprise to investors, who seemingly were expecting a snoozefest. The dollar dropped sharply, government bonds jumped in price and stocks picked up at the end of a rough week as markets baked in those new expectations. A cut next month is now seen as a done deal, with likely chops in the following two meetings too.
“We interpret the market reaction as surprise that Powell so clearly opened the door to rate cuts instead of sticking to the maximum data-dependence message from [its] July meeting,” wrote Richard Clarida, a former Fed official himself and now an adviser at bond investment firm Pimco.
This stance is rather cutely ironic; US President Donald Trump has been banging the drum for interest rate cuts for months. Powell appears vanishingly unlikely to deliver those cuts on the supersized scale Trump has been demanding. “The bar for jumbo cuts seems quite high,” as analysts at Barclays put it. But it does now appear likely that he will deliver something.
It is also not without its risks. If employment data for August picks up from its summer lull, which we will not know until the first week of September, then the Fed will be in the awkward spot of cutting interest rates in to a decent jobs market with inflation still running above target. “The Fed would risk a policy error if it were to cut rates,” warned analysts at Bank of America.
The real drama was away from Powell’s podium, however. Just after he spoke, Trump once again weighed in on the matter of Fed official Lisa Cook. Wearing a trademark red cap with the words “Trump was right about everything” running across his forehead, he declared an intention to fire Cook if she does not resign over allegations of irregularities in her mortgage applications, which she has said she will not be “bullied” into doing.
That is where this all gets tricky. Yes, Powell’s statement on Friday was nuanced. He is simultaneously alert to the risk of inflation accelerating — something he vowed to tackle “come what may”. But he is also alive to the risk that cracks in the jobs market can quickly run out of control. This is standard fare from staid central bankers, who rarely fall hard in one direction or the other, outside of full-blown crises.
But we will all miss this nuance when it is gone. Trump has made no secret of his animosity towards Powell, whom he has described as a “numbskull” for failing to restart aggressive rate cuts much sooner.
The Fed is supported by structures that protect its independence, but anyone who doubts Trump’s desire and willingness to bend it towards his will is kidding themself, as we have already seen with his ousting of the head of the Bureau of Labor Statistics and his nomination of, you guessed it, a loyalist to replace her.
Already, Trump has nominated for a temporary role at the Fed an adviser, Stephen Miran, who has written about the benefits of giving the president the ability to fire central bank officials at will, supposedly in the name of democratisation of the institution.
This time next year, the institution of the Fed will almost certainly look rather different, most likely with a much more Trump-friendly chair at the helm. Investors will need to decide how they read the smoke signals from Fed communications at that point. Would dissents from the chair on rate-setting votes be a good thing? A reassurance that the rate-setting committee remains a home of diverse voices? Or would it be a sign that the chair is adrift from the pack and seeking to take policy in ill-advised directions?
All this is hypothetical for now. But already, the market is showing signs of unease. Recent weeks have brought stubborn weakness in long-term government bond prices in comparison to other government debt of a much shorter maturity — a sign that investors fear central bankers will be under pressure to keep interest rates unduly low to help hold down the cost of lavish borrowing.
Luck is blowing Trump’s way, as it so often does. Borrowing costs are likely to be on the way down without him overtly forcing them lower. But the Jackson Hole meetings of 2026 and beyond could well feel like markedly different events to what markets wonks are accustomed to.