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Rate Cut Probabilities from CME Fedwatch, annotations by Mish

Balance of Risks Has Shifted

In a statement of the obvious, especially regarding jobs, Powell said at Jackson Hole the ‘balance of risks appears to be shifting’.

The Wall Street Journal comments Dow Gains as Fed Chair Powell Opens Door to Rate Cut

Speaking in Jackson Hole, Wyo., Powell cited risks that inflation will continue rising and that the labor market will keep weakening. He called that combination unusual and suggested it could prompt the Fed to support economic growth by reducing rates.

“The balance of risks appears to be shifting,” Powell said. While labor markets appear to be stable, “it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers.”

That has led to an “unusual situation” in which the risks of worse-than-expected labor-market outcomes are rising, he said. “And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment,” Powell said.

Powell’s comments notably tempered expectations of an aggressive string of rate cuts by pointing to concerns around inflation, which has been above the Fed’s 2% target for more than four years.

He also suggested that a so-called neutral setting for interest rates—or the level that neither spurs nor slows economic activity—might be higher than it was last decade. The Fed’s benchmark rate is currently around 4.3%.

Powell said the effects that tariffs are having on consumer prices “are now clearly visible” and are expected to accumulate in the months ahead. The question for the Fed is whether those price increases will “materially raise the risk of an ongoing inflation problem,” Powell said.

The upshot is that the risk of higher inflation, even if temporary, and a softening in the labor market puts the Fed in a “challenging situation,” he said. Because the Fed has cut interest rates by 1 percentage point compared with a year ago, rates are at a somewhat less restrictive setting that allows the Fed to “proceed carefully as we consider changes to our policy stance,” he said.

Giddy Over Rate Cuts

• As I type, gold is up $35 to $3,417.22 per ounce.
• The DOW is up 925 points, about 2 percent, to 45,701.00.
• The S&P 500 is up 999 points, about 1.5 percent to 6,468.91
• The Nasdaq is up 388 points, about 1.8 percent, to 21,486.66

Quotes above are as of 11:15 AM Mountain time.

Bond Market Reaction

The 30-year long bond yield is less enthused, declining only 4 basis points (0.85 percent) to 4.88 percent.

The 2-year note yield reacted much stronger, down 11 basis points (2.80 percent) to 3.686 percent.

One of the first things I do every day is look at bond market yield, especially the long bond.

At 4.88 percent, the yield is still near the upper end of its recent trading range. I will take a closer look at the technical patterns in a following post.

Risks to the Downside

I side with Powell regarding risks to the labor market.

In fact, I have been harping about jobs for quite some time, expecting the negative revisions that happened.

Related Posts

August 1, 2025: Payroll Disaster, Jobs Rise 73,000 but Massive Negative Revisions

There were 258,000 negative revisions in May and June.

August 5, 2025: Troubling Trends in Student Loans, Auto Loans, and Credit Card Late Payments

90-day late payment delinquencies are elevated and rising.

August 21, 2025: Continued Unemployment Claims Jump by 30,000 to New High Since Nov 6, 2021

The labor market is much weaker than most economists realize.

For specific details discussion of why we know this. please see QCEW Report Shows Overstatement of Jobs by the BLS is Increasing

Finally, please note that 5 Million People Have Exhausted All Their Unemployment Insurance Benefits

So, will rate cuts fix a weak labor market? We are about to find out, but my answer is no.

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