Dual mandate conundrum

Bottom line 

In his eighth, and likely final, keynote address at the Federal Reserve’s annual symposium in Jackson Hole, Wyo., this morning, Chair Jerome Powell delivered a dovish speech. He hinted that officials could orchestrate a quarter-point interest-rate cut at their meeting ending Sept. 17, sparking a powerful rally in financial markets.

“With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” Powell said. That should not come as a surprise, as it is consistent with the June Summary of Economic Projections (SEP) implying two cuts in the second half of this year. The markets had been concerned Powell would take a hawkish, hardline approach, with stocks suffering through a five-day decline for the first time since April. They reversed course after his comments: the S&P 500 rallied 1.7%; the Nasdaq Composite leapt 2.0%; the small-cap Russell 2000 Index soared 3.8%; and benchmark 10-year Treasury yields plunged from 4.33% to 4.25%.

Why is the Fed symposium important? This prestigious conference hosted by the Kansas City Fed since 1978, draws central bankers from around the world to discuss monetary policy and economics. The Fed Chair typically delivers a keynote address focusing on important policy topics and the state of the US economy. This year’s theme is “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.” 

Phillips Curve tradeoff Investors were keenly focused on how Powell would parse divergent macroeconomic trends. US gross domestic product (GDP) and the labor market are slowing, but inflation has pick up.

• Economy slowing The core private domestic final sales component of GDP, which includes personal consumption, corporate spending and residential construction, rose an anemic 1.2% in the second quarter of 2025. That has been steadily declining from 3.4% in the third quarter of 2024, 2.9% in the fourth quarter of 2024 and 1.9% in the first quarter of 2025. We anticipate growth will accelerate in 2026, sparked by corporate capital expenditures stimulated by the 100% expensing provision embedded in President Trump’s One Big Beautiful Bill. Consumer spending and housing should also rebound due to lower interest rates and an expanded wealth effect.
• Ditto employment Nonfarm payroll gains have slowed to an average of 35,000 jobs over the past three months, down from an average of 123,000 over the first four months of 2025 and 168,000 during 2024. The unemployment rate rose to 4.2% in July, up from 4.0% in January and 3.4% at its cycle trough in April 2023. The Fed’s SEP is forecasting 4.5% by year-end. “Downside risks to employment are rising,” Powell said this morning. “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.”
• But inflation is rising The nominal Consumer Price Index plunged from a 41-year high of 9.1% year-over-year (y/y) in June 2022 to a four-year low of 2.3% in April 2025, but it has increased to a 2.7% growth rate in June and July. The core Personal Consumption Expenditures Index (or PCE, the Fed’s preferred measure of inflation) peaked at a 39-year high of 5.6% y/y in June 2022 and bottomed at a four-year low of 2.6% in April 2025. But it rose to 2.8% in June. “Higher tariffs have begun to push up prices in some categories of goods,” said Powell. But he explained that, while the effects of tariffs on consumer prices are now clearly visible, they “will be relatively short lived, a one-time shift in the price level.” He added that longer-term inflation expectations “appear to remain well anchored and consistent with our longer-run inflation objective of 2%.” The June SEP forecasted core PCE to rise to 3.1% by year-end but decline to 2.1% in 2027.

Putting it all together “In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside — a challenging situation,” Powell opined. “When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.” But it appears that the downside risks to the labor market outweigh the potential for materially higher inflation.

We expect the Fed to cut interest rates by a quarter point at both its September and December meetings this year, and once each quarter over the course of 2026. That would reduce the upper band of the fed funds range from 4.5% now to 3.0% by year-end 2026, which should boost stocks toward our 7,500 target next year for the S&P 500. 

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