Fed Rate Cut: Powell Warns Inflation Risks Still Tilt to the Upside

The U.S. Federal Reserve has delivered its first interest rate cut of 2025, trimming the benchmark federal funds rate by 25 basis points. While this move provides relief to businesses and households facing tighter credit conditions, Fed Chair Jerome Powell emphasized that the fight against inflation is far from over. Speaking at the Jackson Hole Economic Symposium, Powell noted that “risks to inflation are tilted to the upside,” a warning that signals caution even as the central bank begins easing policy.

Why the Fed Cut Rates

The decision to cut rates comes amid signs of a cooling labor market. Job growth has slowed, unemployment has inched higher, and wage gains are moderating. Powell described the rate reduction as a “risk management cut,” intended to shield the economy from a sharper downturn in employment while still maintaining vigilance on inflation.

Economists point out that the Fed is walking a fine line. On one hand, higher interest rates risk further weakening the labor market, consumer demand, and business investment. On the other hand, cutting too aggressively could reignite price pressures and undo progress made over the past two years in reducing inflation.

Inflation Pressures Still Linger

Powell’s caution reflects several ongoing inflationary forces:

Tariffs and trade disruptions: Higher import costs are feeding through to consumer prices, particularly in goods sectors.
Wage and labor constraints: A tight labor market and slowing immigration continue to push wages upward, adding pressure to service-sector inflation.
Sticky housing and service costs: Housing services and non-goods categories remain elevated and tend to adjust only gradually.
Inflation expectations: If businesses and households begin to expect higher inflation, it can quickly become self-reinforcing.

These factors explain why Powell and the Federal Open Market Committee (FOMC) are unlikely to pursue rapid or aggressive cuts despite recent softening in economic data.

What This Means for Markets

For investors and businesses, the Fed’s latest move suggests a cautious but flexible approach. Markets had priced in the likelihood of a rate cut, but Powell’s warning on inflation signals that the pace of future reductions will be gradual and highly data-dependent. Bond yields may remain elevated, equity markets could experience volatility, and the U.S. dollar may strengthen if inflation surprises to the upside.

The Road Ahead

The Fed’s challenge lies in balancing its dual mandate: promoting maximum employment while maintaining price stability. If inflation shows clear signs of retreating toward the 2% target, the central bank may cut further to support growth. However, if inflation remains sticky or accelerates, the Fed could pause or even reverse course.

For households, businesses, and investors, the key message is clear: while the Fed has opened the door to monetary easing, inflation risks continue to loom large. The path forward will depend on incoming data, making the next few months crucial in shaping U.S. monetary policy.