Gold, Stocks soared as Fed’s Chair Powell signals policy shift

 

·         Although the market was already expecting 50 bps Fed rate cuts in H2CY25, there was also some confusion amid hawkish Fed talks and FOMC minutes

·         Fed may cut 25 bps each in September and December’25, but similar 50 bps rate cuts in 2026 are not assured if US core CPI surges to 3.50% due to Trump’s bellicose policies

·         At around 3.00% average core CPI and 4.3% unemployment rate for 2025, the Fed needs to bring down each to 2.3% and 3.7% targets respectively, to ensure a soft landing

·         Thus, Powell said the balance of risks for both inflation and employment mandates is shifting on the upside from a previous inflation-only upside risk

·         Fed is now worried about a potential US stagflation; i.e., higher inflation and higher employment, and lower GDP growth rate in the coming days

On Thursday, August 21, 2025, Wall Street Futures, Gold were almost flat on lingering suspense about an early Fed pivot, Trump trade & tariff war uncertainty, and Ukraine war ceasefire. Latest FOMC minutes and Fed talks indicate that the Fed may not be ready to start cutting rates from September 2025 amid signs of higher tariff inflation.

On Friday, August 22, 2025, all focus of the market was on Fed Chair Powell’s speech at the annual symposium at Jackson Hole. Wall Street Futures, Gold, and UST soared, while USD plunged after Powell indicated an imminent policy shift. Powell signalled 100 bps gradual rate cuts starting from September 2025; i.e., every alternate meeting amid signs of softening in the labor market. Although Powell acknowledged the risk of higher Trumpflation (tariff inflation), it would most probably be transitory.

Thus, Fed Chair Powell, who is now under immense pressure from Trump to cut rates by ‘300 bps immediately’, indicated the start of the rate cut cycle from September 2025, exactly after one year from September 2024, when the Fed started post-COVID rate cuts. In late 2024, the Fed cuts 50 bps in September, followed by 25 bps each in November and December; i.e. total of 100 bps rate cuts quite unexpectedly, most probably as a front-loading in anticipation of Trump tariff tantrum 2.0 in early 2025. Federal Reserve (Fed) Chair Jerome Powell delivered his final Jackson Hole Symposium speech on August 22, 2025, addressing the economic outlook and the Fed’s monetary policy framework amid a complex economic and political landscape.

Full text of Fed Chair Powell’s speech at Jackson Hole: August 22, 2025

Monetary Policy and the Fed’s Framework Review

Chair Jerome H. Powell

“Over the course of this year, the U.S. economy has shown resilience in a context of sweeping changes in economic policy. In terms of the Fed's dual-mandate goals, the labor market remains near maximum employment, and inflation, though still somewhat elevated, has come down a great deal from its post-pandemic highs. At the same time, the balance of risks appears to be shifting.

In my remarks today, I will first address the current economic situation and the near-term outlook for monetary policy. I will then turn to the results of our second public review of our monetary policy framework, as captured in the revised Statement on Longer-Run Goals and Monetary Policy Strategy that we released today.

Current Economic Conditions and Near-Term Outlook

When I appeared at this podium one year ago, the economy was at an inflection point. Our policy rate had stood at 5-1/4 to 5-1/2 percent for more than a year. That restrictive policy stance was appropriate to help bring down inflation and to foster a sustainable balance between aggregate demand and supply. Inflation had moved much closer to our objective, and the labor market had cooled from its formerly overheated state. Upside risks to inflation had diminished. But the unemployment rate had increased by almost a full percentage point, a development that historically has not occurred outside of recessions. Over the subsequent three Federal Open Market Committee (FOMC) meetings, we recalibrated our policy stance, setting the stage for the labor market to remain in balance near maximum employment over the past year.

This year, the economy has faced new challenges. Significantly higher tariffs across our trading partners are remaking the global trading system. Tighter immigration policy has led to an abrupt slowdown in labor force growth. Over the longer run, changes in tax, spending, and regulatory policies may also have important implications for economic growth and productivity. There is significant uncertainty about where all of these polices will eventually settle and what their lasting effects on the economy will be. Changes in trade and immigration policies are affecting both demand and supply. In this environment, distinguishing cyclical developments from trend or structural developments is difficult. This distinction is critical because monetary policy can work to stabilize cyclical fluctuations but can do little to alter structural changes.

The labor market is a case in point. The July employment report released earlier this month showed that payroll job growth slowed to an average pace of only 35,000 per month over the past three months, down from 168,000 per month during 2024. This slowdown is much larger than assessed just a month ago, as the earlier figures for May and June were revised down substantially. But it does not appear that the slowdown in job growth has opened up a large margin of slack in the labor market—an outcome we want to avoid.

The unemployment rate, while edging up in July, stands at a historically low level of 4.2 percent and has been broadly stable over the past year. Other indicators of labor market conditions are also little changed or have softened only modestly, including quits, layoffs, the ratio of vacancies to unemployment, and nominal wage growth. Labor supply has softened in line with demand, sharply lowering the "breakeven" rate of job creation needed to hold the unemployment rate constant. 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.

Overall, while the labor market appears to be in balance, it is 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. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.

At the same time, GDP growth has slowed notably in the first half of this year to a pace of 1.2 percent, roughly half the 2.5 percent pace in 2024. The decline in growth has largely reflected a slowdown in consumer spending. As with the labor market, some of the slowing in GDP likely reflects slower growth of supply or potential output.

Turning to inflation, higher tariffs have begun to push up prices in some categories of goods. Estimates based on the latest available data indicate that total PCE prices rose 2.6 percent over the 12 months ending in July. Excluding the volatile food and energy categories, core PCE prices rose 2.9 percent, above their level a year ago. Within core, prices of goods increased 1.1 percent over the past 12 months, a notable shift from the modest decline seen over the course of 2024. In contrast, housing services inflation remains on a downward trend, and non-housing services inflation is still running at a level a bit above what has been historically consistent with 2 percent inflation.

The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over the coming months, 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. A reasonable base case is that the effects will be relatively short-lived—a one-time shift in the price level. Of course, "one-time" does not mean "all at once." It will continue to take time for tariff increases to work their way through supply chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process.

It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed. One possibility is that workers, who see their real incomes decline because of higher prices, demand and get higher wages from employers, setting off adverse wage–price dynamics. Given that the labor market is not particularly tight and faces increasing downside risks, that outcome does not seem likely.

Another possibility is that inflation expectations could move up, dragging actual inflation with them. Inflation has been above our target for more than four years and remains a prominent concern for households and businesses. Measures of longer-term inflation expectations, however, as reflected in market- and survey-based measures, appear to remain well anchored and consistent with our longer-run inflation objective of 2 percent. Of course, we cannot take the stability of inflation expectations for granted. Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem.

Putting the pieces together, what are the implications for monetary policy? In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate. Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance. Nonetheless, with policy in a 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. We will never deviate from that approach.

Important Footnotes in Powell’s Jackson Hole speech: August 22.2025

·         After the July 2024 employment report, the 3-month average of the unemployment rate had increased by more than 0.5 percentage points above its lowest value over the previous 12 months.

·         In early September, the Bureau of Labor Statistics will publish a preliminary estimate of benchmark revisions to the level of nonfarm payrolls as of March 2025, based on data from the Quarterly Census of Employment and Wages. Data available to date suggest that the level of nonfarm payrolls will be revised down materially. The final benchmark revision will be incorporated into the monthly employment data in February 2026.

·         The total downward revision of 258,000 between May and June was spread across private-sector industries as well as state and local government employment, particularly education, and reflected both additional information from surveyed establishments and the re-estimation of seasonal factors.

·         Using the consumer price index and other information, an estimate of the contribution of housing services to 12-month core PCE inflation in July was 0.7 percentage points, while core services excluding housing contributed 2.0 percentage points. The contribution from each of these categories remains slightly above its average during the 2002–07 period, during which core PCE inflation averaged about 2 percent. In contrast, the contribution of core goods to 12-month core PCE inflation in July was about 0.25 percentage point, compared with the 2002–07 average of −0.25 percentage point.

Highlights of Fed Chair Powell’s comments in his Jackson Hole Symposium speech: August 22, 2025

·         Shifting balance of risks may warrant adjusting policy

·         Fed now sees more risk in its maximum employment mandate than price stability

·         Fed will now prioritize its policy more on employment mandate rather than price stability as inflation is almost near the target 2.0%, but unemployment is still 60 bps higher than the maximum/pre-COVID levels of 3.5%

·         Labor supply has softened in line with demand amid immigration/deportation issues

·         The situation suggests that downside risks to employment are rising

·         The situation suggests that downside risks to employment are rising

·         GDP growth has slowed notably, reflecting a slowdown in consumer spending

·         Latest data indicates 12-month PCE inflation rose 2.6% in July; Core rose 2.9%

·         The effects of tariffs on consumer prices are now clearly visible; I expect effects to accumulate in the coming months

·         The reasonable base case is that the inflation effects of tariffs will be short-lived

·         It is possible that tariff-driven upward pressure on prices could spur a lasting inflation dynamic, but it is unlikely, given downside risks to the labor market; a weak labor market may limit employees' bargaining power to negotiate for higher wages, which will ensure no wage-inflation spiral

·         Tighter immigration has led to an abrupt slowdown in labor force growth, limiting the unemployment rate

·         We cannot allow a one-time increase in price level to be an ongoing inflation problem

·         The slowdown in job growth has not opened up a large margin of labor market slack, which we want to avoid

·         Labor supply has softened in line with demand, and breakeven job growth is down sharply

·         The labor market is in a curious kind of balance

Federal Reserve Chair Jerome Powell’s speech at the Jackson Hole Economic Symposium on August 22, 2025, titled “Economic Outlook and Framework Review,” addressed the U.S. economy’s resilience amid shifting risks, monetary policy adjustments, and updates to the Fed’s policy framework.

Highlights of Powell’s Speech

Shifting Balance of Risks and Potential Rate Cuts: Powell indicated that the balance of economic risks is shifting, with downside risks to employment rising due to a slowing labor market and upside risks to inflation from tariffs. He suggested that this shift “may warrant adjusting our policy stance,” signaling a potential interest rate cut at the Fed’s September 2025 meeting. He emphasized proceeding cautiously, noting that the stability of the unemployment rate allows the Fed to adjust policy carefully, avoiding deep rate cuts despite Trump’s pressures.

Labor Market Concerns: Powell highlighted a significant slowdown in job growth, with July 2025 adding only 73,000 jobs, well below expectations, and downward revisions to prior months brought the three-month average to 35,000. He noted that tighter immigration policies have reduced labor force growth, increasing the risk of a sharper economic downturn if hiring remains sluggish. The unemployment rate rose to 4.3%, significantly higher than pre-COVID levels of 3.5%. He expressed concern about “unusual” labor market behavior, indicating that downside risks to employment are rising which could justify rate cuts to support economic stability.

Inflation and Tariffs: Inflation, measured by the Personal Consumption Expenditures (PCE) index, has risen from 2.1% in April to 2.6% in June 2025, above the Fed’s 2% target, partly due to tariffs. Powell suggested tariffs might cause a one-time price increase rather than sustained inflation, but the Fed remains vigilant to prevent entrenched inflation; the Fed sees Tariff inflation as transitory. He stressed that the Fed would not allow a one-time price increase to become an ongoing inflation problem, indicating a cautious approach to rate cuts. Powell stressed the need to assess whether tariffs could lead to more persistent inflationary pressures. Powell sees a 2.9% core PCE inflation reading for July’25 based on available core CPI and PPI data; the Fed’s actual target of core PCE inflation is 1.6% (pre-COVID levels), which is equivalent to 2.3% core CPI inflation and overall 2.0% average core inflation (PCE+CPI).

Monetary Policy Framework Review: Powell announced updates to the Fed’s 2020 policy framework, which had allowed inflation to temporarily exceed 2% and focused on employment “shortfalls.” The revised framework removes the “shortfalls” language to allow preemptive action on labor market tightness and adopts a more balanced approach to inflation and employment. The Fed is moving away from flexible average inflation targeting, recognizing that recent supply shocks and inflation volatility require a more proactive strategy.

Economic Resilience and Dual Mandate: Powell noted that the U.S. economy has shown resilience despite significant policy changes. The labor market remains near maximum employment, while inflation, though elevated, has decreased from post-pandemic highs. However, he highlighted a shifting balance of risks, with rising downside risks to employment and upside risks to inflation due to tariffs.

Policy Stance and Potential Rate Cuts: Powell signaled openness to adjusting monetary policy, suggesting that the current restrictive stance (with the federal funds rate at 4.25%–4.5%) might warrant changes due to growing risks to the labor market. He emphasized a cautious approach, stating that the stability of the unemployment rate allows the Fed to “proceed carefully” in considering policy changes. He did not commit to a specific rate cut but indicated that a cut could be considered at the September 16–17, 2025, meeting, with markets now estimating almost a 90% chance of a 25 bps rate cut in September (vs 75% before Powell’s speech). The market is now also almost fully pricing another 25 bps rate cut in December for a cumulative 50 bps rate cut in 2025.

Political Pressures and Fed Independence: Powell’s speech occurred amid intense pressure from President Trump, who has criticized the Fed’s independence, called for Powell’s resignation, and threatened to fire Fed Governor Lisa Cook over unverified allegations of mortgage fraud. Powell indirectly defended the Fed’s independence, emphasizing its role in serving the public by maintaining price stability and employment without political interference. Addressing pressure from President Donald Trump, who has demanded rate cuts and called for Powell’s resignation, Powell emphasized the Fed’s commitment to data-driven decisions, stating, “We will never deviate from that approach.” He underscored the importance of maintaining the Fed’s independence to serve the public effectively. Powell’s speech was described as a potential “legacy moment,” balancing the Fed’s dual mandate of stable prices and maximum employment while defending his tenure amid political scrutiny.

Analysis of Powell’s speech

Balancing Act in a Complex Environment:

Powell faces a challenging economic landscape where inflation is creeping up due to tariffs, while the labor market shows signs of fragility. His cautious tone reflects the Fed’s data-dependent approach, avoiding firm commitments to heavy rate cuts while acknowledging the need for potential policy adjustments amid the threat of a looming stagflation due to unpredictable Trump policies. The speech underscores the Fed’s dual mandate (price stability and maximum employment) being in tension, with tariffs driving inflation and immigration policies weakening labor supply. Powell’s emphasis on “proceeding carefully” suggests a preference for gradualism over aggressive rate cuts, despite market expectations.

Labor Market near Maximum Employment, But Needs Caution

Powell describes the labor market as “near maximum employment,” indicating that it remains strong despite recent challenges. According to the speech, the unemployment rate was 4.2% in July 2025, a historically low level, and has been broadly stable over the past year. Other labor market indicators, such as quits, layoffs, the ratio of vacancies to unemployment, and nominal wage growth, have either remained stable or softened only modestly. The 2024 average unemployment rate was 4.0%, and 2025 (till July) was 4.2%, higher than the pre-COVID 2019 average unemployment rate of 3.7%; i.e., 50 bps higher than maximum employment levels, with an upward risk and also above the Fed’s standard 4.0%, but still lower than 4.5%-5.0% red line zone.

However, Powell notes a significant slowdown in job growth, with the July 2025 employment report showing a three-month average of only 35,000 jobs added per month, down from 168,000 per month in 2024. This slowdown, compounded by substantial downward revisions to earlier data (258,000 jobs for May and June), suggests a cooling labor market. Despite this, Powell emphasizes that the labor market has not developed significant slack, which the Fed aims to avoid.

A key factor is the slowdown in labor supply due to tighter immigration policies, which have reduced labor force growth. This has lowered the headline unemployment rate and also the “breakeven” rate of job creation needed to maintain a stable unemployment rate, creating an unusual balance where both labor demand and supply are slowing.

Inflation Progress: Thinks Trump’s tariff inflation will be transitory, but maintains a cautious stance

Powell notes that inflation, while still “somewhat elevated” at 2.6% (total PCE prices) and 2.9% (core PCE prices) over the 12 months ending in July 2025, has declined significantly from its post-pandemic highs. This reflects progress toward the Fed’s 2% target, driven partly by the unwinding of pandemic-related supply disruptions and the Fed’s restrictive monetary policy (raising the policy rate by 5.25 percentage points over 16 months). However, Powell highlights that recent tariffs are pushing up prices, particularly for goods, with core goods inflation rising 1.1% over the past year compared to a modest decline in 2024. Housing services inflation is trending downward, but non-housing services inflation remains above levels consistent with the 2% target.

The average US core CPI inflation for 2025 (Till July) was around 3.0% against 3.4% in 2024 and 2.3% in 2019. Fed’s actual target for price stability is 1.6% core PCE, which is equivalent to 2.3% core CPI and the average of both is 2.0% core inflation (PCE+CPI). Overall, the present level of inflation is still above 70 bps from the Fed’s target with an upward risk.

Powell thinks that tariff-related price increases are likely a “one-time” shift in the price level rather than a persistent inflationary force, though this depends on the evolution of tariff policies and their impact on supply chains. Powell also dismisses the likelihood of wage-price spirals due to the labor market’s lack of tightness but acknowledges the risk of unanchored inflation expectations, which the Fed will monitor closely to prevent sustained inflation above 2%. Overall, Powell thinks Trump’s tariff inflation would be most likely transitory, but also maintains a cautious outlook that it could be more persistent and volatile due to policy uncertainties.

Shifting Balance of Risks to Higher For Both Sides of Mandate (Maximum Employment and Price Stability)

The phrase “the balance of risks appears to be shifting” reflects Powell’s concern about evolving economic dynamics. He identifies rising downside risks to employment due to the sharp slowdown in job growth and potential for rapid increases in layoffs and unemployment if these trends worsen. Simultaneously, upside risks to inflation persist, driven by tariffs and the fact that inflation has exceeded the 2% target for over four years. This dual challenge complicates monetary policy, as the Fed’s dual mandate—maximum employment and stable prices—requires balancing these competing risks.

Powell notes that the current policy rate (4.25%-4.5% as of August 2025) is in restrictive territory but 100 basis points closer to neutral than a year ago, suggesting room to adjust policy, potentially through rate cuts (2025-26), to support the labor market while addressing the threat of higher inflation.

Policy Framework Shift:

The revision to the 2020 framework is a significant acknowledgment that the post-pandemic economic environment requires a more preemptive and balanced approach. The 2020 framework’s focus on allowing inflation overshoots contributed to delayed responses to the 2021–2022 inflation surge, and Powell’s adjustments aim to avoid similar missteps. By removing the “shortfalls” language and flexible inflation targeting the Fed signals readiness to act on both high and low inflation and labor market tightness, reflecting lessons from recent supply shocks.

Revised Monetary Policy Framework:

The speech also details the Fed’s revised *Statement on Longer-Run Goals and Monetary Policy Strategy*, moving away from the 2020 flexible average inflation targeting (which included a “makeup” strategy for inflation overshoots) to a flexible inflation targeting framework. This shift reflects lessons from post-pandemic high inflation due to excessive fiscal stimulus and persistent supply shocks. Key changes include removing the focus on the effective lower bound (ELB), eliminating the “shortfalls” language to clarify preemptive action against labor market tightness, and emphasizing well-anchored inflation expectations to support both employment and price stability.

Political Context and Fed Independence:

Trump’s public attacks on Powell and the Fed, including threats to fire Governor Cook, influencing Fed appointments, create a politically charged backdrop. Powell’s speech subtly reinforced the importance of central bank independence, aligning with historical Fed chairs like Volcker, Greenspan, and Bernanke, who used Jackson Hole to defend their policies. The allegations against Cook and Trump’s push for rapid rate cuts highlight risks to the Fed’s autonomy, which could undermine its ability to manage inflation and employment effectively. Powell emphasizes the Fed’s independence, particularly in response to political pressures (e.g., from President Trump), stating, “We will never deviate from that approach.” This underscores his commitment to data-driven policy over external political influence; i.e., Fed will go by economic calendar & outlook, not by Trump’s political calendar & rhetoric.

Economic Outlook:

Powell’s speech reflects a cautious optimism about the economy’s resilience but acknowledges rising risks. The labor market’s slowdown, with revised job growth figures and a 4.3% unemployment rate, signals potential weakness, while tariff-driven inflation complicates the Fed’s path. The Fed’s ability to navigate these risks depends on incoming data, particularly the July PCE inflation report and August jobs data, which will shape the September decision of a 25-bps rate cut, which is now almost a done deal.

Economic Challenges:

Powell highlights structural changes, such as higher tariffs and tighter immigration policies, which complicate distinguishing cyclical from structural economic trends. These policies affect both demand and supply, making it harder to calibrate monetary policy, which is better suited to addressing cyclical fluctuations rather than structural ones.

Monetary Policy Outlook:

As usual, Powell signals that the Fed is not on a preset course but will make data-driven decisions. The stability of the unemployment rate allows the Fed to “proceed carefully” in considering policy changes, but the shifting risks may warrant easing the restrictive stance. Fed may cut 25 bps each in September and December 2025, followed by a long pause again in H1CY26 and then again cut another 50 bps in H2CY26 (September + December) to balance both sides of the mandate to bring the unemployment rate below 4% and core inflation average 2.5% by 2026.

Market Implications:

Powell’s dovish signals boosted market optimism, but the lack of explicit commitment to rate cuts and warnings about tariff-driven inflation tempered expectations for aggressive easing. The market’s reaction suggests confidence in a September cut, but analysts warn of potential volatility if Powell’s balanced tone is perceived as hawkish, as December is not a done deal yet. Rate-sensitive sectors (e.g., homebuilders, small caps) are particularly vulnerable to Powell’s messaging, as they have rallied on rate-cut expectations. A cautious approach could lead to a near-term correction.

Summary

Jerome Powell’s 2025 Jackson Hole speech was a pivotal moment, signaling a potential shift toward interest rate cuts in September while addressing rising employment risks and tariff-driven inflation. The revised monetary policy framework reflects lessons from recent economic challenges, prioritizing flexibility and preemption. Amid political pressures, Powell defended the Fed’s independence, reinforcing its commitment to data-driven policy. Markets reacted positively, but uncertainty remains about the pace and extent of rate cuts, with implications for economic stability and investor sentiment.

Powell’s speech underscores a cautious but adaptive approach to monetary policy in a complex economic and political environment. The labor market’s strength, declining but still elevated inflation, and shifting risks (downside for employment, upside for inflation) suggest the Fed may consider rate cuts to support employment while remaining vigilant about inflation. The revised framework reflects a return to flexible inflation targeting, prioritizing anchored expectations and a balanced approach to the dual mandate.

Conclusions

The average US core CPI inflation for 2025 (Till July) was around 3.0% against 3.4% in 2024 and 2.3% in 2019. Fed’s actual target for price stability is 1.6% core PCE, which is equivalent to 2.3% core CPI and the average of both is 2.0% core inflation (PCE+CPI). Overall, the present level of inflation is still above 70 bps from the Fed’s target with an upward risk. The 2024 average US unemployment rate was 4.0%, and 2025 (till July) was 4.2%, higher than the pre-COVID 2019 average unemployment rate of 3.7%; i.e., 50 bps higher than maximum employment levels, with an upward risk and also above Fed’s standard 4.0%, but still lower than 4.5%-5.0% red line zone. Thus Fed needs to bring down both US core inflation by around 70 bps and the unemployment rate by around 60 bps from expected 2025 average levels of 3.0% (core inflation) and 4.3% (unemployment rate) by 2027.

Thus, to balance the dual mandate of 2.0% minimum price stability (average core inflation-PCE+CPI) and 3.7% maximum unemployment, the Fed may cut 25 bps each in September and December 2025, followed by a long pause in H1CY26 and then again cut another 50/25 bps in H2CY26. Fed has to take calibrated monetary policy actions to balance both sides of its mandate to bring the unemployment rate below 4% and core inflation average 2.5% by 2026 and then further bring down the unemployment rate to 3.7% and core inflation to 2.0% by 2027. Fed has to act carefully to ensure a soft landing and no stagflation-like scenario for the US economy (higher inflation, higher unemployment rate and lower economic growth).

Fed may cut 25 bps each in September and December 2025, followed by a long pause again in H1CY26 and then cut another 25 bps in September’26, if average US core CPI inflation rises to around 3.50% in 2026 from 3.00% in 2025 due to Trump’s policies. And the Fed may not cut rates at all in 2026 if US core CPI inflation really surges towards 3.50% average in 2026.

Then, if US core CPI inflation really comes down towards 3.00% and 2.30% in 2027 and 2028 (assuming transitory Trumpflation), the Fed may cut 50 bps in 2027 and 25 bps in 2028 for a longer run terminal rate of 3.00% against pre-COVID levels of 2.50%. Fed may keep the longer run neutral rate around 1.00% against 0.50% in pre-COVID times assuming lower US productivity and higher inflation dynamics. If US core CPI inflation does not surge in 2026 towards a 3.50% average rate, then the Fed may cut 50 bps also in 2026, followed by another 50 bps in 2027 for a terminal rate of 3.00% by 2027 (in line with June’25 dot-plots).

Bottom line: 50 bps Fed rate cut in H2CY25 is now a done deal, but another 50 bps cut in 2026 is not a done deal yet

As base case, Fed may cut 50 bps in H2CY25 (September and December) in line with Hune’25 dot-plots, but another 50 bps rate cut in 2026/H2CY26 may not be certain if US core CPI inflation really surges towards 3.50% average in 2026 from 3.00% in 2025. Fed may cut only 25 bps or even opt for no cuts in 2026 if US unemployment rate continues to hover around 4.30% or edges down to 4.00% on average in 2026 against 3.50% core CPI inflation.  Another option (as best case) is that the Fed may cut 100 bps in H2CY26 to front load and opt for no rate cuts in 2026, but it would be most unlikely.

Market impact:

On Friday, August 22, 2025, Wall Street Futures, Gold, and UST surged, while USD slid after Fed Chair Powell indicated an imminent rate cut in September ’25, which may be followed by another 25 bps in December’25. US stocks soared on Friday after Fed Chair Powell signaled the possibility of a September rate cut during his Jackson Hole speech, sparking the strongest cross-asset rally since April. Although Fed rate cuts of 50 bps in H2CY26 were well anticipated by the market since June’25, the market was confused due to recent FOMC minutes and hawkish comments by most of the Fed officials. Powell’s Jackson Hole speech on Friday cleared the market confusion about 50 bps cumulative rate cuts in H2CY26 and there was a relief rally.

On Friday, the S&P 500 and Nasdaq-100 climbed 1.5% and 1.9%, respectively, while the Dow Jones surged 846 points to a record intraday high. Wall Street was boosted by consumer discretionary, energy, communication services, materials, financials, real estate, industrials, techs, healthcare, and utilities, while dragged by consumer staples. Intel shared after reports that the Trump administration plans to take a 10% stake in the chipmaker. The rally allowed markets to recover from earlier weakness tied to mega cap tech, leaving the Dow and S&P 500 with weekly gains and trimming the Nasdaq’s losses; only three scrips of DJ-30 were in the red.

Weekly Technical outlook: DJ-30, NQ-100, SPX-500 and Gold

Looking ahead, whatever may be the narrative, technically Dow Future (CMP: 45700) now has to sustain over 45600-45800 for a further rally to 46400-46500 and only sustaining above 46500, may further rally to 47100/47200 in the coming days; otherwise sustaining below 45500-45300-44900, DJ-30 may again fall to 44200/43900-43400/42400 and 41700/41200-40700/39900 in the coming days.

Similarly, NQ-100 Future (23600) now has to sustain over 23700 for 24000-24200* and further rally to 24300/24450-24700/25000 in the coming days; otherwise, sustaining below 24250/24000-23750/22900, NQ-100 may again fall to 22400/22200-21900/20900-20700/20200 and 19890/18300-17400/16400in the coming days.

Looking ahead, whatever may be the fundamental narrative, technically SPX-500 (CMP: 6550) now has to sustain over 6600 for a further rally to 6800/7000-7500/8300 in the coming days; otherwise, sustaining below 6575/6525-6500, may fall to 6450-6375/6300-6250/6200 and further fall to 6000/5800-5600/5300 in the coming days.

Technically Gold (CMP: 3372) has to sustain over 3380 for a further rally to 3405*/3425-3455/3475 to 3495/3505*, and even 3525/3555 in the coming days; otherwise sustaining below 3375-3350, Gold may again fall to 3330/3320-3308/3290* and 3255*/3225*-3200/3165* and further to 3130/3115*-3075/3015-2990/2975-2960*/2900* and 2800/2750 in the coming days.

 

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