In May 2024, Fed Chair Jerome Powell said that he didn’t see the “stag” or the “flation” in the U.S. economy, dismissing the notion that America was entering a period of stagflation.
Fast forward a year, and the inflation picture looks very different.
At the annual Jackson Hole Symposium on Friday, Powell acknowledged that risks are now pulling in opposite directions. “Risks to inflation are tilted to the upside, and risks to employment are tilted to the downside,” he said.
That’s a line that market newsletter The Kobeissi Letter called “a long way of saying ‘stagflation.’
The shift marks one of Powell’s clearest warnings yet. For months he had highlighted tariffs as a source of upward price pressure, but on Friday he also conceded that the labor market is losing momentum.
“If those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment,” Powell said.
Powell’s speech effectively opened the door to a September rate cut that had been in doubt just weeks ago. In response, Fed funds futures boosted the odds of a September cut by nearly 10 percentage points to 89%.
Trump’s pressure campaign
The dovish turn comes against a backdrop of immense political pressure.
President Trump has openly demanded that the Fed deliver the largest rate cut in history to boost the economy and to ease the government’s debt burden, which has swelled to $1.2 trillion annually in interest costs.
Powell has long argued for Fed independence, but his fate may already be sealed.
His current term ends in May, and Trump has signaled he’s considering multiple candidates to replace him. Among the biggest contenders are figures like David Zervos or Rick Rieder.
But Powell isn’t standing alone. Other Fed officials have also begun softening their stance as signs of economic weakness accumulate.
Boston Fed President Susan Collins, a voting member of this year’s Federal Open Market Committee, recently signaled she is open to cutting rates in September if labor market risks grow.
Like Powell, Collins acknowledged that inflation is still too high but stressing that rising joblessness could force the Fed’s hand.
“If upcoming data show that the risks of a weakening labor market outweigh those of elevated inflation, then it may be appropriate soon to begin dialing back rates,” she said.
With both inflation and unemployment risks now flashing, the Fed faces its toughest trade-off since the pandemic era. And this time, Powell’s once-confident dismissal of stagflation doesn’t land quite the same way.
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