Federal Reserve Chairman Jerome Powell initially assuaged investor concerns on Tuesday with a more dovish-than-expected outlook on monetary policy, but the relief proved fleeting after President Donald Trump escalated trade tensions with China.
Speaking at a National Association for Business Economics meeting in Philadelphia, Powell indicated that the Fed’s focus is shifting toward the weakening U.S. labor market. While the central bank’s dual mandate requires balancing 2% inflation with stable employment, recent data suggests these goals may be in conflict. Powell’s comments signal a rebalancing of priorities toward supporting job growth.
Citing private and Federal Reserve bank data in the absence of official government statistics, Powell noted a significant slowdown in payroll gains. “While the unemployment rate remained low through August, payroll gains have slowed sharply,” he said, attributing the trend in part to lower immigration and labor force participation. “In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen.”
On inflation, Powell acknowledged that near-term figures remain close to 3% but emphasized that “most longer-term expectation measures remain aligned with our 2% goal.” Analysts interpreted this as a willingness to disregard temporary, tariff-related price hikes when setting the trajectory of monetary policy.
Investors reacted positively, seeing the remarks as a clear signal for further interest rate cuts. The probability of a 25-basis-point reduction at the Fed’s October meeting rose to nearly 96%, according to CME’s FedWatch tool.
However, the market optimism was short-lived. In a late-night post on Truth Social, President Trump accused China of “an economically hostile act” for not purchasing U.S. soybeans. “We are considering terminating business with China having to do with cooking oil, and other elements of trade, as retribution,” Trump wrote.
The threat undermined market hopes for de-escalation and represented another reversal from the White House, which had recently offered assurances of a forthcoming trade deal despite threatening 100% tariffs on Friday. The move came as new data showed Chinese exporters have found success by focusing on global trade outside the United States.
The conflicting signals led to a volatile session and mixed results across global markets. The VIX volatility index spiked 3% late Tuesday following Trump’s post. Before the opening bell Wednesday, S&P 500 futures were up 0.59% after the index closed down 0.16%. In Europe, markets were largely positive, with Germany’s DAX up 0.23% and the Euro STOXX 50 up 1.45%. Asian indices also saw gains, with Japan’s Nikkei 225 and the Hang Seng Index both rising over 1.7%.
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