Over the past week, typically quiet summer markets were awakened by a surprisingly dovish speech by Federal Reserve (Fed) Chair Jerome Powell at the annual Jackson Hole Economic Policy Symposium and an unprecedented attempt to remove a sitting Fed Governor. The following is a recap of these developments, along with our perspective and key takeaways.
Jackson Hole Recap—Rate Cuts Likely in September
Heading into his August 22 speech at the annual Jackson Hole Economic Policy Symposium, the consensus was that Powell would preserve maximum policy flexibility ahead of the September 17 Federal Open Market Committee (FOMC) meeting, buying more time to see the August labor market and inflation data. Anticipated topics for Powell’s speech included the importance of central bank independence, the 2025 Policy Framework Review and a brief acknowledgment of last month’s softer labor data. Ahead of the meeting, markets were pricing roughly a 70% probability of a September rate cut (down from over 100% immediately following the July jobs report).
In a somewhat surprising turn, Powell’s remarks went further than expected in emphasizing risks to the labor market, downplaying the likelihood of a wage-price spiral, and indicating that a shifting balance of risks “may warrant adjusting” the policy stance. Despite inflation remaining above target and measures of confidence and growth suggesting a potential rebound in Q3, most street forecasters were quick to interpret Powell’s comments as signaling a 25-basis-point rate cut at the September 17 FOMC meeting.
Our baseline expectation is that the Fed will cut rates two or three times in 2025, starting at the next meeting in September. This view is generally consistent with current market pricing. The decision to proceed with cuts at each meeting in September, October and December, or to move on a quarterly schedule in September and December will ultimately depend on the August and September inflation and labor market data. In the near term, we look to the September 5 Nonfarm Payrolls report to either validate or push back against last month’s heavy revisions. Our expectation is for continued gradual softening, which should give the Fed the needed justification to resume cutting rates.
Tariff-related inflation pressures have been and will continue to be difficult to forecast. It’s our view that a good portion of the committee currently ascribes to “Team Transitory,” though they appear less willing to use those words after the 2022 experience. We also recognize that upcoming changes in the composition of the Fed Board and ongoing political pressures could drive further easings to be priced in despite the expectation that goods prices will move higher.
The market is now pricing a terminal rate below 3.00%, although expectations for reaching that level have shifted out to early/mid 2027 from late 2026/early 2027. Achieving this outcome would likely require an undershoot of current inflation forecasts or a more pronounced softening in the labor market; however, forecasts beyond the end of 2025 are highly uncertain given the plethora of cross currents that we’re currently facing (tariffs, OBBBA, demographic/immigration shifts, AI implementation, etc.).
Ultimately, we see the Fed as being at the beginning of a series of cuts, with the pace and extent to be defined by the incoming data and, to a lesser extent, the evolution of the political landscape. While our view is broadly in line with market expectations, we remain cautious about assuming the market-implied path for lower rates given the persistent uncertainties around inflation, labor market dynamics and the potential for further erosion of the Fed’s independence.
Does “You’re Fired” Work at the Fed?
On Monday, President Trump announced via Truth Social that Fed Governor Dr. Lisa Cook has been removed from the Board of Governors, effective immediately. Citing his authority under the Federal Reserve Act to remove a sitting governor “for cause.” Trump alleged that the basis for Cook’s removal was mortgage fraud purported to have occurred prior to her tenure at the Fed. Dr. Cook has already challenged the President’s authority, stating that she will not vacate her post, and it remains to be seen how this action will ultimately be resolved in the courts.
If Cook’s removal is upheld (her term is set to expire in 2038), President Trump would have the opportunity to appoint two new governors, with the potential for a third should Fed Chair Powell step down after his term as Chair concludes in May. In that scenario, Trump appointees would hold five of the seven seats on the Board of Governors, giving them significant influence over the direction of monetary policy and the structure of the Federal Reserve System.
The composition of the Fed Board of Governors could significantly influence the appointment or reappointment of Regional Bank Presidents in February 2026. Unlike Board Governors, Regional Bank Presidents serve five-year terms that conclude in years ending in 1 or 6, with their appointments and reappointments subject to approval by the Federal Reserve Board of Governors. Should the Board be dominated by Trump appointees, this process could further consolidate their influence within the Federal Reserve System and perhaps reshape the role of a Regional Bank president.
In the immediate aftermath of the announcement, front-end yields declined amid rising expectations of a Trump-loyalist-dominated FOMC, while long-end yields remained elevated due to mounting concerns over a further erosion of Fed independence. However, the implications extend beyond day-to-day market swings. The Fed has long been viewed as a cornerstone of global financial stability, valued for its insulation from politics. If global investors begin to see the Fed as being subject to political interference, they may reassess their trust in US assets. This risk comes at a sensitive time, with America’s rising deficits and growing debt load, which are already fueling concerns about fiscal dominance and dampening demand for US Treasuries.