Market commentary by Chief Economist Gerhard Winzer, Erste Asset Management GmbH
Federal Reserve Chair Jerome Powell paved the way for a potential rate cut in September. Financial markets reacted immediately: stocks, bonds, and gold prices rose, while the U.S. dollar weakened against the euro. Normally, this wouldn’t be headline news—but the significant political pressure from the U.S. administration on the Fed has shifted attention to how Powell would respond.
How does it sound when the world’s most influential central banker hints at a rate cut? Like this: “Given the restrictive stance of policy, evolving risks could warrant an adjustment to our monetary policy stance.” In plain terms: the inflation spike caused by tariff hikes is expected to be temporary, while risks to the labor market have increased. A cynical view might also mention the risks to the Fed’s independence. An analytical perspective could point out that Powell spoke of an “adjustment,” not an explicit “cut.” But in context, the message is clear: a rate cut is on the table.
The Fed faces a challenging environment. Inflation risks remain tilted to the upside, while the U.S. government is openly demanding aggressive rate cuts. There’s also talk of reshuffling members of the FOMC (the rate-setting committee) and even amending the Federal Reserve Act. Last week, President Trump threatened to fire Board member Lisa Cook unless she resigned, citing allegations of mortgage fraud.
The Fed’s dual mandate—price stability (2% inflation) and maximum employment—now comes with an added challenge: preserving its independence. Historically, in such situations, the employment goal tends to gain weight. Powell addressed this tension by emphasizing that FOMC decisions are based solely on data. To signal a rate cut, he highlighted downside risks to the labor market.
Job growth has indeed slowed sharply: the three-month average is now just 35,000. It’s unclear whether this reflects weaker labor demand from businesses or a shrinking labor supply. The former would justify rate cuts. One could say the Fed has issued a “speed warning.” Why? Because the unemployment rate has an uncomfortable pattern: after small initial increases, it often spikes suddenly—historically a recession signal. Still, Powell advocates caution, noting that unemployment and other labor indicators remain stable.
If the slowdown in job growth is mainly due to reduced labor supply—caused by halted immigration and mass deportations—a rate cut would be a mistake. It would stimulate demand while supply remains constrained, fueling wage and price inflation.
On inflation, the Fed also found a rationale for easing. Tariff-related price increases are evident but considered temporary. The key question: do they significantly raise the risk of persistent inflation? In the Fed’s baseline scenario, the answer is no.
The shift from a hawkish (inflation-fighting) to a dovish (growth-supportive) Fed is short-term positive for risk assets like equities—especially when economic indicators remain strong. Last week, the preliminary August PMI jumped to 55.4, signaling upside risks to growth expectations.
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