Powell Hints at September Rate Cut: What It Could Mean for the U.S. and the World

By Jaehyun Lee, Steph Kang

On Aug. 25, Fed Chair Jerome Powell hinted at a rate cut starting from September. What could this mean for the US and the rest of the world?

The Federal Reserve System of the United States is the central banking system, responsible for managing the nation’s monetary policies. Their two key goals, stated in the Fed’s official website, are promoting maximum employment, and endorsing stable prices. The Fed’s Open Market Committee(FOMC) meets eight times annually, discussing factors such as state of growth, inflation, and employment. The FOMC decides whether it is time to change their monetary policy,  Their stance of monetary policy influences interest rates and financial conditions. The United States’ potent influence on the world economy induces the Federal Reserve’s every decision to bring significant impact to the global economy.

The interest rate set by the Fed has stayed in the 4.25%~4.5% range since December 2024. However, in the latest Jackson Hole Symposium, an annual three-day international conference, Fed chair Jerome Powell repeatedly mentioned how the US economy has faced challenges. Many experts believe that there will be a rate cut, and according to an article by Morgan Stanley, markets expect an 80% chance of the Fed cutting the interest rate. Below is a excerpt from Fed Chair Powell’s speech. 

“This year, the economy has faced new challenges. Significantly higher tariffs across our trading partners are remaking the global trading system. Tighter immigration policy has led to an abrupt slowdown in labor force growth. Over the longer run, changes in tax, spending, and regulatory policies may also have important implications for economic growth and productivity. There is significant uncertainty about where all of these policies will eventually settle and what their lasting effects on the economy will be.

Changes in trade and immigration policies are affecting both demand and supply. In this environment, distinguishing cyclical developments from trend, or structural, developments is difficult. This distinction is critical because monetary policy can work to stabilize cyclical fluctuations but can do little to alter structural changes.

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Overall, while the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers. This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.

At the same time, GDP growth has slowed notably in the first half of this year to a pace of 1.2 percent, roughly half the 2.5 percent pace in 2024. The decline in growth has largely reflected a slowdown in consumer spending. As with the labor market, some of the slowing in GDP likely reflects slower growth of supply or potential output.”

Throughout his speech, Mr. Powell repeatedly alluded to the labor market, and the abrupt slowdown in labor force growth. However, he still stated that the labor market seems to ‘be in balance.’ Thus, it seems that changes in GDP growth and the labor market are the factors driving the Fed’s decision.

Whilst hinting about the rate cuts in September, Powell showed his concern that “In the near term, risks to inflation are tilted– a challenging situation” during the speech, depicting the U.S. economy being caught between two opposing risks. Opinions within the Fed are divided: some officials support easing the Fed Cut as inflation slows, while others argue that the labor market, and other economic indicators point to a solution: a rate cut.

Prospects of an upcoming rate cut comes against a backdrop of a slowing economic cycle. Inflation, while easing from its peak, continues to hover above the Fed’s 2% target and not being completely free from the increase to 3% in the long term to the upside, and risks to employment to the downside(2026-2027). At the same time, signs of labor market weakening are emerging, with slower job creation and rising concerns over employment security. High interests have also weighed heavily on corporate investments and consumer spending, adding pressure to the broader growth overall. This past process of the American economy starts from the start of the pandemic.

The consequences the COVID-19 pandemic introduced began from supply chain disruptions to an overall economic downturn. In 2020, the US GDP decreased significantly  and the unemployment rate was the highest in US history at 14.8%. To quickly cease the progress of a potential economic recession and high unemployment rate, the Fed had decided to temporarily lower the interest rates.

In July 2023, the Federal Reserve increased its benchmark interest rates for the 11th time since March 2022. In a sixteen-month period, commonly referred to as the ‘Fed Rate Hike,’ the Fed had successively increased the interest rates since the end of the pandemic so as to tackle the inflation trends caused since the Fed Cut in 2020. Back in the December 2021 FOMC press conference, Fed Chair Jerome Powell projected his concern: “In September – I’d say after Labor Day – it started to become clear that this was both larger in its effect on inflation and more persistent.” He added that the Fed got the Employment Cost Index before the meeting, which was a ‘very high reading’ and showed ‘no increase in labor,’ i.e. labor supply has not increased, but demand remains strong. They predicted the central bank’s benchmark interest rate to rise to 0.9% in 2022 and signaled additional interest hikes; the prediction came true, and kept increasing until 2023 and continued.

When high inflation excessively lowers the currency’s value, interest rates have to be raised. This allows the central bank to retrieve currency from consumers and from individuals to companies, combating the trend of consumer savings. However, higher interest rates also results in less spending , which can lead to stagnation and ultimately, economic failure. 

In contrast, interest rates are lowered when the central bank decides that it is time to kick-start the economy. With lower interest rates, individuals withdraw their money from banks, and start to spend it. Companies, with less burden of having to pay off their loans at a higher price, start to take bigger loans from the bank and make greater investments. This results in inflation, and can also lead the economy to stagnate.

So how does the Federal Reserve affect the global economy? Once interest rates are cut, inflation takes place. The value of the dollar decreases, as more currency is supplied to the market. This makes American products selling abroad cheaper and appealing. Thus, exports may increase, whereas imports decrease. This results from how the value of foreign currencies rises, making European and Chinese products, for example, more expensive.  For Europe, China, etc., a weak dollar can pose a problem. Exports decrease, because their products lose price appeal in the US market. This is especially true for companies that deliberately lower their prices. Also, as US products become cheaper in their own domestic market, local companies can be threatened. This is why after the Fed’s decisions, countries can tend to follow. 

Asian countries can also cut their rates, to avoid these debilities. Many Asian countries are export-driven, which means they are more vulnerable to changes in the American economy. The Federal Reserve has not yet announced officially that interest rates will be cut, and other countries have not as well, but there are prospects of some Asian countries lowering their interest rates around September and October. According to SeekingAlpha, a crowd-sourced content provider on financial news, announced that while South Korea kept its interest rates unchanged, it may cut them in October. This prospect mainly comes from the Fed’s hinting of its own change of monetary policy. Many will wait with anticipation for the next announcement.