After Jackson Hole, Jay Powell primed markets for easing. The August jobs report and the next inflation reading will decide how far and how fast.

Speaking in Jackson Hole last week, Federal Reserve Chair Jerome Powell said the balance of risks has shifted: inflation is nearer to target while downside risks to employment are rising. That message—paired with his remark that policy is still in “restrictive territory” and may warrant adjustment—set the stage for the U.S. central bank to cut interest rates at its September meeting. Futures markets promptly priced in high odds of a quarter‑point move. But Wall Street’s conviction could still be upended by a duo of data points arriving just before policymakers gather: the August Employment Situation report and the August Consumer Price Index. Together, those reports will either validate Powell’s pivot or force a rethink.

What Powell signaled at Jackson Hole

Powell’s speech emphasized a careful, data‑dependent approach. He noted that payroll growth has slowed markedly this year and that the unemployment rate—4.2% in July—has edged up even as longer‑run inflation measures are easing. He also flagged new supply‑side frictions, from higher tariffs to slower labor‑force growth, that complicate the outlook. With policy rates still above neutral, he argued the baseline outlook and shifting balance of risks could justify easing, even as the Fed remains vigilant about inflation expectations. In plain English: the door to rate cuts is open, but the next steps depend on what the data say between now and mid‑September.

The duo to watch: jobs and inflation

1) The August jobs report (Employment Situation). Released on the first Friday of September, the report is the last comprehensive labor‑market read before the September FOMC meeting. Beyond headline nonfarm payrolls, officials will study the unemployment rate, average weekly hours, and wage growth. Downward revisions to prior months have already revealed a weaker hiring trend than previously thought, and a further downshift—especially if average weekly hours slip—would sharpen concerns about a cooling economy. Conversely, a surprise rebound in hiring, a drop in joblessness, or re‑acceleration in average hourly earnings could weaken the case for immediate easing.

2) The August CPI report. Arriving the following week, CPI will shape how comfortable the Fed feels about cutting into an inflation backdrop still sensitive to tariffs and services prices. Policymakers will focus on core inflation and, within that, services—particularly categories like medical services and “super‑core” services that are closely tied to wages. Shelter inflation continues to cool with a lag, while energy prices and airline fares can be volatile month to month. A tame 0.2% month‑over‑month core reading would reinforce the narrative that inflation is moving sustainably toward 2%. A 0.3%–0.4% print would suggest sticky momentum and could test the market’s confidence in a September cut.

How the numbers could sway the Fed

• Soft‑landing, green light: Payrolls below ~75,000, unemployment drifting to 4.3%–4.4%, and core CPI at 0.2% m/m or lower. That mix would validate Powell’s concern about employment risks and likely cement a September cut, with discussion of the pace of follow‑up moves.

• Noisy but manageable: Payrolls around 100,000–150,000, unemployment steady near 4.2%, and core CPI at 0.2%–0.25% m/m. The Fed could still ease, framing it as recalibration from restrictive levels rather than the start of an aggressive cutting cycle.

• Hot‑data detour: Payrolls re‑accelerate above ~175,000, wage growth prints 0.4% m/m or higher, and core CPI at 0.3%–0.4% m/m. That outcome would challenge the case for an imminent cut, pushing the Committee to either delay action or stress a one‑and‑done approach. It wouldn’t close the easing window, but it could materially reduce the odds of sustained cuts through year‑end.

Why these two reports dominate the debate

These releases land squarely inside the Fed’s decision window and map directly to its dual mandate. The employment report speaks to maximum employment: job creation, labor‑force health, and pay. The CPI speaks to price stability: inflation’s speed and breadth across goods and services. Together they provide a near‑real‑time check on whether policy is still too tight—or becoming too loose. Other indicators—the PCE price index, ISM surveys, retail sales—matter, but they either arrive later or tell a less comprehensive story in the time remaining before the meeting.

Markets are leaning dovish—leaving room for a surprise

Rate‑futures markets quickly moved to price high odds of a September cut after Powell’s remarks and the latest inflation print. Treasury yields fell and equities rallied, reflecting the view that the inflation fight is largely won while growth downshifts in an orderly way. That positioning, however, is vulnerable to a one‑two punch of stronger‑than‑expected hiring and sticky core inflation. A hot jobs/CPI combo would likely lift short‑dated yields, steepen the front end of the curve, and pressure richly valued segments of the equity market—especially rate‑sensitive small caps and higher‑multiple tech. Conversely, a soft pair of prints would support a broader rally, ease financial conditions, and embolden expectations for additional cuts later in the year.

Inside the data: the details that matter

• Revisions and hours worked. Large negative revisions, combined with a dip in average weekly hours, often signal cooler final demand than headline payrolls alone suggest.
• Wage growth vs. services inflation. The Fed will cross‑check average hourly earnings against momentum in non‑housing services inflation; persistent wage‑services heat would argue for caution.
• Shelter disinflation’s lag. New‑lease rent measures have cooled, but the CPI shelter component reflects that with a delay. Continued deceleration here would add confidence that core inflation is on a sustainable path lower.
• Tariff passthrough. Goods categories affected by new tariffs may show price bumps. Policymakers will ask whether these are one‑time level shifts or the start of broader second‑round effects.

What it means for households and businesses

If the Fed cuts in September, mortgage rates and some consumer loan rates could grind lower, though spreads and term premiums may limit the pass‑through. Corporate borrowers with floating‑rate debt would see quicker relief. A delay, by contrast, would keep financing costs elevated into the fall, a headwind for interest‑sensitive sectors such as housing, autos, and capital goods. Either way, the path of rates from here is likely to be shallower than in past cycles: with inflation near 2%–3% and growth cooler, policymakers can move gradually—unless the data force their hand.

The bottom line

Powell has set the stage for easing, but he hasn’t called the play. Two reports—the August jobs data and the August CPI—will write the script for September. If they confirm cooling inflation and a labor market that’s losing steam, expect the Fed to begin dialing back restraint. If they don’t, the first cut could slip out of reach, reminding investors that even late in the fight against inflation, the data still rule the day.