This year’s Jackson Hole central banking symposium brought a clear shift in tone. According to Karsten Junius, Chief Economist at Bank J. Safra Sarasin, Fed Chair Jerome Powell’s new risk assessment was the key driver behind last Friday’s rally in risk assets. A rate cut in September now looks highly likely, although the conference offered several other important insights.
Powell’s key messages
In his speech, Powell highlighted several noteworthy points:
- A labor market in fragile balance. Both labor demand and supply have declined, which Powell said points to an increasing risk of job losses.
- Limited inflation impact from tariffs. Higher import tariffs only raise prices temporarily. Powell considered a wage–price spiral unlikely, as the labor market is not particularly tight.
- Room for monetary easing. The shifting balance of risks could justify an adjustment in policy rates.
- Policy only modestly restrictive. Powell described current policy as “modestly restrictive,” which strengthens the case for a September rate cut. A series of rapid cuts would only follow if the labor market deteriorates further.
- Return to a flexible inflation target. The Fed is abandoning its “make-up strategy,” which sought to compensate for undershooting inflation with higher inflation later. Recent experience has shown that higher inflation is indeed possible and that expectations remain well anchored, making the strategy redundant.
Nakamura: the limits of the Taylor rule
Beyond Powell’s remarks, one of the most notable contributions came from Nakamura and his co-authors. They argued that the Taylor rule—which prescribes that policy rates should rise more than inflation—has not worked since 2008 and should not serve as a guide for the future.
Instead, they suggested that central banks can afford to ignore temporary shocks under certain conditions. The critical factor here is credibility: as long as inflation expectations remain firmly anchored, central banks have more flexibility. But Nakamura warned that credibility—built over decades through the Fed’s track record and institutional independence—can be lost much more quickly than it was gained.
Lagarde: exceptional job growth in the euro area
ECB President Christine Lagarde stressed in Jackson Hole how remarkable it is that inflation in the eurozone has declined sharply without the usual cost of higher unemployment. On the contrary: between late 2021 and mid-2025, employment increased by 4.1%, representing 6.3 million additional jobs.
This exceptional labor market performance allowed inflation to fall back toward target without triggering a recession. For financial markets, such a soft landing is crucial: it reduces the risk of recessions caused by monetary tightening and thereby supports higher valuations for risk assets.
