Powell Makes Room for Rate Cut. Fed Kills “Average Inflation” Targeting that Caused so Much Damage when Inflation Raged

Fed to “proceed carefully” with changes to policy stance amid heavy concerns about rising inflation.

By Wolf Richter for WOLF STREET.

Powell’s speech today at the Jackson Hole conference had two major components: Short-term monetary policy and for the long term, the Fed’s new monetary policy framework.

Monetary policy: “shifting balance of risks may warrant adjusting our policy stance,” but “carefully.”

Powell made room for a rate cut in September, as “the balance of risks appears to be shifting” to concerns about the labor market.

But it was tempered with lots of concerns about inflation, including his projection that the 12-month core PCE price index for July, to be released in a week, would accelerate further to 2.9%.

Cutting rates as inflation is accelerating is a delicate affair that could spook the bond market and drive up long-term rates – which is precisely what happened in 2024 when the Fed cut by 100 basis points and long-term yields rose by over 100 basis points.