In a wide-ranging speech at the Federal Reserve’s summer retreat in Jackson Hole, Wyoming, Chairman Jerome Powell on Friday signaled that interest rates are likely headed lower in the near term but also laid out a new framework for dealing with monetary policy in the future.

Powell acknowledged that inflation has “been above our target for four years and remains a prominent concern for households and businesses.”

But he also cautioned that the labor market has softened of late – with monthly jobs numbers now averaging only 35,000 additional jobs over the last three months compared to 168,000 in 2024.

“Labor supply has softened in line with demand, sharply lowering the ‘breakeven’ rate of job creation needed to hold the unemployment rate constant,” Powell said. “Indeed, labor force growth has slowed considerably this year with the sharp falloff in immigration, and the labor force participation rate has edged down in recent months.”

The changing economic landscape, as well as the anticipated impacts of President Donald Trump’s import tariffs, means that an interest rate cut is likely. Markets now believe the first cut will come when the Fed next meets in September, with some analysts saying there could be one more cut in December.

Powell said that “with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance. Monetary policy is not on a preset course. FOMC members will make these decisions, based solely on their assessment of the data and its implications for the economic outlook and the balance of risks.”

For consumers, that could yield a lower cost of borrowing going forward but not a substantial decline in interest rates, as market rates remain elevated.

“Jerome Powell’s speech in Jackson Hole paves the way for a September rate cut,” said Paul Stanley, chief investment officer at Granite Bay Wealth Management. “Whether it will be 25 basis points or 50 basis points is still unknown, but the idea that the Fed is open to cutting rates is bullish for stocks. Investors have been worried in recent months about the sudden and sharp slowdown in hiring, and lower rates would help to ease financial conditions and potentially give employers more confidence to expand and hire.”

Powell’s final speech at Jackson Hole (his term as chairman ends in May) comes as the Fed is grappling with sharp criticism from Trump and his surrogates, who have openly called for the chairman to step down before his term expires. Trump has also gone after Fed Governor Lisa Cook over an allegation of mortgage fraud.

“This is part of a deliberate attempt to destabilize the Fed,” says Richard Portes, professor of economics at London Business School.

Portes and other economists fear the Fed may have to deal with “stagflation” – a combination of stubborn inflation and weak economic growth. That puts pressure on the central bank’s dual mandate of trying to maintain stable prices and a healthy labor market. Should the Fed keep interest rates high to ward off inflation or lower them to stimulate the economy?

“For a central bank, this is the worst of possible circumstances,” Portes says.

Powell has said that interest rates would already be lower were it not for the impact of import tariffs that Trump first proposed in April but then delayed with some really only taking effect this month. There have been indications in some of the inflation data that companies have seen higher prices because of the tariffs, but much of it has yet to reach the consumer.

“We do not know the full impact of the tariffs,” says Venkat Balakrishnan, head of asset allocation at MissionSquare Retirement. “Definitely, we see tariff pass-throughs in some categories.”

Another factor is that aggressive enforcement of immigration laws may be curbing the supply of labor, and that is leading to a slowdown in the pace of job growth.

Powell also outlined a new framework for how the Fed handles monetary policy, an update to what the central bank did in 2020 when the economy faced extraordinary low interest rates. The new framework keeps the Fed’s 2% target for annual inflation but seeks to make its policy more clear and also puts emphasis on the central bank’s commitment to maintaining a strong labor market.

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Some of the wording changes appear to address the concern in the post COVID-19 recovery, when the Fed insisted the highest inflation in 40 years was “transitory” before acknowledging it was not. The original framework was a response to the era of extremely low inflation and modest growth that followed the global financial crisis of 2008, allowing for a fluid approach to the 2% target when inflation was running well below that.

“Although not as exciting for news headlines, Chair Powell discussed in today’s speech the four main revisions to the policy framework, a review the Fed does roughly every 5 years,” said Jeffrey Roach, chief economist at LPL Financial. “Demographics, fiscal policy, and other factors suggest that the long-term neutral fed funds rate is likely higher than during the 2010s.”

Markets appeared to like the tone of Powell’s speech, with the Dow Jones Industrial Average soaring by more than 700 points.