The US stock market experienced a surge on Friday following the Federal Reserve’s strongest signal yet that interest rates may be cut this fall. However, Fed Chair Jerome Powell’s speech at the annual Jackson Hole symposium also delivered a reality check on where interest rates could settle in the longer term.
Powell stated that the neutral rate of interest – the point at which the economy is neither growing nor contracting – might be higher than during the 2010s. This suggests that even if interest rates are cut, they may not return to pre-pandemic levels. The Fed’s long-term outlook is more unstable, according to Powell.
Higher interest rates mean borrowing money for loans like mortgages will become more expensive. In 2021, the average 30-year fixed mortgage rate was under 3%. Now it’s closer to 6.7%, paired with near-record-high home prices, many Americans will struggle to purchase homes.
The Fed is seeking a “Goldilocks” balance between high and low interest rates. Rates that are too high risk unemployment, while rates that are too low could lead to higher inflation. Policymakers are searching for a neutral level where everything is just right.
Before Trump’s second term, many economists believed the central bank was close to achieving this balance. The Fed raised rates in 2022 to combat inflation, which rose to its highest levels in a generation. However, despite the rapid increase in rates, the jobs market remained strong, and unemployment remained historically low.
However, things changed when Trump returned to office. His campaign promises included a full-blown trade war against key trading partners, which has led to higher prices for US consumers due to tariffs. Powell stated that tariffs have started to push some prices up, but the effects are still being monitored.
The labor market, once strong, has grown sluggish. There are fewer job openings and fewer people looking for jobs. Powell called this a “curious kind of balance” where both supply and demand for workers have slowed. The instability in the labor market has made Fed officials more open to a rate cut.
Powell’s speech was cautious, warning that it’s difficult to distinguish cyclical developments from structural changes. Monetary policy can stabilize cyclical fluctuations but may not alter structural changes. This suggests that when executive policies destabilize the economy, the Fed’s ability to limit damage is limited.
Source: https://www.theguardian.com/business/2025/aug/22/federal-reserve-trump-rate-cuts