Powell's Rate Cut Assessment: Weighing Tariffs vs. Labor Market

Strategic Insights -

Federal Reserve Chair Jerome Powell's Friday statement on potential rate cuts was a significant market mover. In assessing whether a rate cut is warranted, Powell is considering the higher inflation caused by Trump tariffs and weighing it against a weakening labor market. Powell believes the labor market is not tight and faces increasing downside risks, making it unlikely that workers will secure pay increases to cover the costs imposed by tariffs. This could lead to a one-time uptick in inflation, which Powell estimates will be relatively short-lived.

Key Takeaways:

  • Powell is concerned about the higher inflation caused by Trump tariffs, but believes it will be a one-time uptick if tariffs do not rise further.
  • Powell estimates that the labor market is not currently strong enough for workers to secure pay increases to cover the costs imposed by tariffs.
  • The slowing labor market, with workers reluctant to quit their jobs and hiring slowing, supports Powell's assessment.
  • The rate of wage growth has slowed from 4.0 percent in 2023 and 2024 to 3.7 percent in the last three months compared to the prior three months.
  • The 30-year mortgage rate has grown 60 basis points higher than the 10-year treasury bond rate, potentially limiting the impact of lower interest rates on the housing market.
  • Trump's threats to fire Powell or Governor Lisa Cook if they do not lower rates undermine confidence in the US as a safe investment destination, which could raise longer-term rates.

Statistics:

  • The interest rate on 30-year bonds was 4.15 percent in August last year, 30 basis points higher than the 10-year bond rate.
  • The interest rate on 30-year bonds is currently 4.9 percent, 60 basis points higher than the 10-year Treasury bond rate last Friday.
  • The rate of wage growth has slowed to 4.7 percent from around 4.0 percent in 2023 and 2024.
  • The rate of wage growth for the lowest paid workers in hotels and restaurants is 2.5 percent.

Sources:

  • Jerome Powell's speech, "Opening Statement: FOMC Press Conference" (August 22, 2025), Federal Reserve Board
  • Various market data, including 10-year and 30-year bond rates.