Powell’s Jackson Hole Crossroads: Inflation Data Recasts September Rate Outlook

Federal Reserve Chair Jerome Powell heads into the 2025 Jackson Hole symposium with one of his most difficult policy communication tests yet. July’s steady Consumer Price Index (CPI) came just days before a shock spike in Producer Price Index (PPI) data, forcing traders to reassess the near-term interest rate path. With labor market indicators weakening and upstream prices rising, Powell’s August 23 speech is now a key risk event for rate expectations across asset classes.

The Fed’s dual mandate—stable prices and maximum employment—is under strain. Market participants have tempered expectations for aggressive easing, with odds for a September cut now modest rather than certain. Powell must present a message that maintains credibility on inflation control while acknowledging signs of softening in the labor market, all while considering the risk of tariff-driven price pressure making its way to consumers.

CPI and PPI Send Conflicting Signals

The week of August 11–15 delivered sharp divergence in U.S. inflation data. Headline CPI rose 0.2% month-over-month, leaving the annual rate at 2.7%—below the 2.8% forecast and consistent with disinflation. Core CPI increased 0.3%, in line with expectations. Risk assets rallied: the S&P 500 and Nasdaq reached new highs, the Russell 2000 jumped 3%, and Treasury yields declined as markets priced in near-certain September easing.

S&P 500 rallying after August inflation data. Source: TradingView

That bullish narrative collapsed with Thursday’s PPI release. Wholesale prices surged 0.9%—the largest monthly increase since mid-2022—driven by services inflation. Fresh vegetables spiked 38.9%, trade margins rose 2%, and portfolio management fees jumped 5.4%. The magnitude and breadth of cost increases suggest that inflation pressure is building at the production level.

The reaction was immediate. The 2-year yield rose six basis points to 3.73%, while the 10-year tested 4.29%. Traders fully removed the possibility of a 50-basis-point cut, with expectations for a 25-basis-point move dropping to 93%. The dollar strengthened, and equities gave back gains as positioning adjusted.

Tariff Effects Not Yet Fully Priced

Economists increasingly agree that businesses are absorbing tariff-related import costs—for now. But several analysts believe that pricing pressure could soon be passed to consumers. JPMorgan points to elevated tariff collection data but notes the lag in pass-through. Their business surveys show that more than half of affected firms plan to raise prices within three months.

Bank of America has taken the most cautious stance, removing all 2025 cuts from its outlook. Its team argues that if core PCE stays above 3% and expectations move higher, the Fed could be forced to resume hikes. Citigroup remains dovish, forecasting 50-basis-point cuts in both September and November. Their case: as inflation slows, the real policy rate tightens unless nominal rates are adjusted lower—particularly if job growth remains weak.

Oxford Economics emphasizes the timing of price transmission. They warn that recent gains in tariff-sensitive categories could mark the start of broader price increases. The key question for the Fed is whether July’s PPI surge is a one-off or the beginning of a more sustained move higher.

U.S. PPI YoY reaccelerates to ~3.3%, signaling upstream price pressure. Source: TradingView

Labor Market Weakness Limits the Fed’s Options

Weak labor data adds further complexity. July payrolls rose just 73,000, well below estimates. Revisions to prior months removed another 258,000 jobs, and an upcoming benchmark adjustment is expected to subtract 818,000 more through March 2024.

This year’s Jackson Hole theme, “Labor Markets in Transition,” reflects this deterioration. Powell is unlikely to offer near-term rate guidance but will aim to justify the Fed’s framework. Markets will look for signals on whether the Fed will prioritize weakening job data or rising price risks.

The symposium has consistently moved markets. Powell’s 2022 speech triggered a 3.4% S&P 500 selloff after warning of economic pain needed to tame inflation. His 2024 remarks, which supported easing, pushed equities up 1%.

Dollar, Gold, and Sector Positioning Ahead of Powell’s Remarks

Traders enter Jackson Hole with reduced exposure to easing. Rate cut expectations have dropped to 95–100 basis points for 2025, down from 130 basis points earlier this year. Any shift in Powell’s tone could realign rates, currency pairs, and equity positioning.

The U.S. dollar index has firmed, now testing resistance at 99.320. A stronger stance on inflation could push the index to 100.257 and potentially 101.977. A more accommodative tone could weaken the dollar, offering support for gold, which is trading near $3,335.70.

DXY weekly testing 99.32; watch 100.26 and 101.98 as next resistance. Source: TradingView

Richmond Lee, CFA and Senior Market Analyst at PU Prime, commented:

The US Dollar remains range-bound as investors struggle to find clear direction amid mixed economic signals and a lack of high-impact data this week. Recent inflation readings have delivered conflicting messages, making it difficult to anticipate the Federal Reserve’s policy trajectory.

Adding to the uncertainty are ongoing geopolitical developments. President Donald Trump has been actively engaging in ceasefire discussions between Russia and Ukraine, with potential meetings scheduled this week. Any progress — or setbacks — in these talks could trigger short-term volatility in the dollar.

For now, the market remains in a “wait-and-see” mode ahead of the Jackson Hole symposium, where Fed communication may provide stronger policy cues. Until then, the dollar is likely to trade sideways, with upside potential limited unless new catalysts emerge.

Gold remains tightly linked to real yields and Fed policy expectations. A restrictive tone from Powell could pressure gold down to the $3,268.12–$3,244.41 zone. A deeper move toward $3,120.76 is possible, though technical buyers may step in near the 52-week moving average at $2,949.56. On the upside, confirmation of a dovish stance could send gold beyond $3,500.20.

Gold consolidating near ~$3,335; range bounded by $3,268–$3,244 support and $3,500+ resistance. Source: TradingView

Sector-wise, technology and REITs remain sensitive to rate expectations and would benefit from a more accommodative message. Financials could outperform if Powell signals an extended pause or the potential for rate hikes, supporting a steeper curve.

September Decision Will Hinge on Upcoming Data

Several critical releases will shape the Fed’s policy direction ahead of the September 17–18 meeting. The August jobs report, due September 5, is forecast to show payroll gains of 161,000—more than double July’s figure. Any shortfall could strengthen the case for cuts.

September’s inflation data follows shortly after, with PPI on the 10th and CPI on the 11th. These prints will reveal whether July’s producer price surge is starting to flow into consumer costs. With core CPI still at 3.1%, any acceleration would complicate a cut. The PCE index, the Fed’s preferred inflation measure, won’t be released until after the meeting, increasing the importance of Powell’s Jackson Hole message.

Bond markets will assess whether Powell appears open to adjusting policy to reflect softer jobs data—or whether he holds the line on price control. Too much accommodation could loosen inflation expectations. Too firm a tone could risk overtightening into a slowing labor market.

Outlook: Powell’s Message Will Set the Q4 Tone

Jackson Hole will set the stage for how markets trade into Q4. Powell must deliver a message that reinforces the Fed’s commitment to its price stability mandate while acknowledging rising employment risks. The sharp disconnect between CPI and PPI reflects pipeline pressures that could push consumer prices higher in the coming months.

Markets have already scaled back aggressive cut assumptions. But Powell’s message could still drive a repricing. If he emphasizes upstream inflation risks, yields and the dollar could rise, while equities and metals come under pressure. If he stresses labor conditions and implies flexibility, risk assets may rally and the dollar could ease.

In the near term, market direction will depend on Powell’s tone. A more restrictive stance favors the dollar, short-end yields, and financials. A dovish message would support gold, tech, and rate-sensitive equities. Either way, Powell’s speech will likely produce a strong market response across all major asset classes.