Wall Street Eyes Powell for Fed Rate Cut Clues Amid Market Highs

As US stocks hover near their all-time peaks, Wall Street's attention is firmly fixed on Federal Reserve Chairman Jerome Powell. Investors are hoping for further insights into how aggressively the Fed intends to cut interest rates in the near future. Powell is scheduled to deliver a speech on the economic outlook at a luncheon in Rhode Island. This comes shortly after the Fed's first rate cut of the year, a decision that fueled a fresh rally in the stock market.

Analyzing Powell's Potential Remarks

While it's unlikely that Powell will unveil any major new policy shifts, investors will be meticulously analyzing his words to glean clues about the potential timing and magnitude of future rate reductions. Betting markets are currently pricing in a 25-basis-point cut to the benchmark short-term interest rate at each of the Fed's final two meetings of 2025, in October and December. More cuts are expected to follow next year, although the Fed's own projections suggest a slower pace of easing than many investors are anticipating.

Concerns Over Labor Market and Inflation

Fed watchers on Wall Street believe that Powell favors further rate cuts this year to help ensure that the unemployment rate doesn't rise significantly again. The Fed chair last week backed rate cuts as a "risk management" move, citing signs of weakness in the labor market. US hiring growth has slowed to a crawl, the unemployment rate has crept higher, and the unemployed are taking much longer to find another job. At the same time, inflation has proven stubbornly high and has drifted further away from the Fed's 2% target. According to the latest Consumer Price Index (CPI) reading, inflation is nearing 3%. Powell and other Fed officials have emphasized that they must remain vigilant about the risks to their dual mandate: keeping inflation low and maintaining a strong labor market. For now, the Fed appears to be more concerned about employment.

The Impact of Tariffs

Because former US President Donald Trump imposed new tariffs on goods imported into the United States, inflation has not risen as much as expected. Most Fed officials believe that any inflation caused by tariffs will only be temporary. However, Powell and his colleagues are also aware that they have misjudged inflation in the past and could do so again. Powell said last week, "There is no risk-free path now. What to do is not obvious. So we have to watch inflation very carefully." While Powell is unlikely to directly address these arguments in his speech in Warwick, Rhode Island, he is expected to outline the rationale behind taking a gradual approach.

The Fed's Balancing Act

Navigating the current economic landscape requires a delicate balancing act. While the labor market shows signs of cooling, inflation remains above the Fed's target. This creates a complex challenge for policymakers, as aggressive rate cuts could reignite inflationary pressures, while holding rates too high could stifle economic growth. Powell's remarks will be crucial in understanding the Fed's strategy for managing these competing risks.