Powell speech makes Wall Street go nuts. But why did it change anything?

The Federal Reserve’s Open Market Committee has held its main interest rate steady since Trump Admin 2.0 started as the threat of tariffs and higher prices arrived, ending a short run of rate cuts in the last few months of 2024.

But we’ve seen several indications that more rate cutting may be happening at the Fed’s next meeting in September, especially when job growth for May and June was revised down near zero on August 1, to go along with a subpar gain of 73,000 jobs for July.

And so a lot of attention was being paid to comments from Fed Chair Jerome Powell at a gathering of elites in Jackson Hole, Wyoming, to see what if there would be hints of what would be coming up.

In a speech that touched both on the economic outlook and the Fed's new policy framework, Powell took pains to note that risks from inflation remain "tilted to the upside," saying that tariff-related inflation pressures "are now clearly visible."

"We expect those effects to accumulate over [the] coming months," Powell said, "with high uncertainty about timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem."

Powell added on inflation that the Fed "will not allow a one-time increase in the price level to become an ongoing inflation problem."

So that means Powell and the Fed is aware of what a lot of us have been noticing in the last month – inflation is likely to pick up as companies pass on tariff costs and other higher expenses to consumers.

That was reiterated in an otherwise upbeat survey of businesses by S&P that came out this week, where all sorts of firms reported significant price pressures.

Tariffs were reported as the key driver of further cost increases in August. Companies across both manufacturing and service sectors collectively reported the steepest rise in input prices since May and the second-largest increase since January 2023. Rates of increase accelerated in both sectors. While the manufacturing cost rise was especially large, being the second-steepest since August 2022, the service sector increase was the second-highest since June 2023.

Average prices charged for goods and services rose at the sharpest rate since August 2022 as firms passed higher costs on to customers. Although goods price inflation cooled slightly for a second month in a row, it remained among the highest seen over the past three years. Service sector price inflation meanwhile was the sharpest since August 2022.

“Highest price inflation since 2022” isn’t something that you want to hear, as year-over-year inflation peaked at 9.1% in June of that year. And much of that 2022 inflation was due to gas being at $4-$5 a gallon back then, not the sub-$3 levels we've been seeing in Wisconsin these days.

Would that mean the Fed might they not cut rates next month, when most of us thought they would? Well, there’s the matter of the stalling job market.

On the labor market, Powell noted that the hiring slowdown in recent data, combined with a slowdown in the growth of the labor force, creates "a curious kind of balance that results from a marked slowing in both the supply of and demand for workers."

"This unusual situation suggests that downside risks to employment are rising," Powell said. "And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment."

Add in a Powell comment about how the Fed was likely to “adjust our policy stance”, and coked-up traders decided they heard what they wanted to hear, and believe that this would allow them to hit a jackpot.

The odds of a September rate cut jumped Friday and U.S. stocks rallied after Federal Reserve Chair Jerome Powell struck a dovish tone in his speech at the central bank’s annual Jackson Hole Symposium.

According to federal funds futures trading data, traders now see a nearly 90% chance the Fed lowers rates by 25 basis points on Sept. 17, up from 75% yesterday…

Treasury yields tumbled following Powell’s comments. The yield on the 10-year Treasury note, which influences the interest charged on all kinds of consumer loans, dropped about 8 basis points to 4.25%. The benchmark yield has seesawed between 4% and 4.5% for most of the year as investors, like the Fed, waited to see how President Trump’s tariff policies would affect the economy.

Take a guess when Powell’s comments hit the news.

So we still expect an interest rate cut to happen, as we did yesterday, whjle the Fed Chair admits that inflation is likely to reignite, and also admits that we could well see recessionary-like jobs numbers coming soon.

Maybe I’m just operating in the real world too much and not part of the one that coked-up traders live in, but I don’t see anything that should allow us to think this (lack of?) news is an extra reason to be buying stocks. At this point, all this 900-point gain will do is blow the Price-to-sales Bubble even higher, and make the inevitable deflation of this Bubble larger than it should be.

And while I’m not sure we should be cutting rates in September, I figured that the Fed would be doing so, based on public comments and soft economic data in recent weeks. But how would that rate cut change the trajectory of a staling economy? It’s not going to drive wages higher or lead to more hiring. Consumer sentiment has been on the decline and real consumer spending has been flatlining even before tariff-driven inflation hits. I can’t think that gets better as prices rise for the rest of 2025.

The real question is whether there will be additional cuts beyond this, or if inflation from tariffs, a cheap dollar, and a lack of labor supply and shortages due to a widespread deportations would quickly end and possibly reverse that loosening cycle.

That's what we call stagflation, folks. And that would stymie the Fed, and likely lead to a lot of disappointment from those same Wall Streeters that had a bout of exuberance today.