Executive Summary

At the Jackson Hole meeting in August 2025, Federal Reserve Chair Jerome Powell signaled a return to the traditional framework of prioritizing price stability as a prerequisite for employment stability. While markets are pricing in a 70% probability of a September rate cut, the Fed remains cautious. This article outlines three potential rate cut scenarios and their implications for investors.

Key Takeaways from Jackson Hole
Rate Cut Scenarios (Probability Weights)
Data-Dependent Triggers
Market Impact
Investor Implication
Conclusion

Key Takeaways from Jackson Hole

Policy Framework Reset: Shifting away from the 2020 “inclusive employment” focus, back toward prioritizing inflation control.
Divergence on September Cut: Markets expect ~70% probability, but Fed officials remain cautious.
Economic Contradictions: Core inflation at 3.1% YoY in July, while the labor market shows signs of slowing.
Independence Emphasized: Amid rising political pressure, Powell reaffirmed Fed independence.

Rate Cut Scenarios (Probability Weights)

Base Case (55%): Year-End Cut (Nov–Dec)

Trigger: Core PCE (3-month annualized) trending near 2.5%, wage growth slowing further.
Aligns with Fed’s cautious stance.

Early Case (30%): September Cut

Trigger: Sharper-than-expected labor market deterioration and consecutive disinflation prints.
Markets expect it, but independence concerns make it politically sensitive.

Delayed Case (15%): Postponed to Early 2026

Trigger: Tariff- or energy-driven inflation stickiness.
The policy reset allows the Fed to justify a “patient hold.”

Data-Dependent Triggers

Inflation: Core PCE (3-month annualized) below 2.5% for multiple months.
Labor: Rising unemployment, lower job openings, and wage growth easing to ~3%.
Financial Conditions: Overall environment not excessively loose, to avoid inflation resurgence.

Market Impact

Bonds: Base case = modest 10y decline, curve steepening; Early cut = yields drop across maturities.
FX (USD/JPY): Early cut → weaker USD, supporting gold and commodity currencies.
Equities: Rate-sensitive sectors (REITs, high-dividend stocks) benefit in early cut case.
Commodities: Gold and silver gain on early easing; delayed cut = stronger USD, bearish gold bias.

Investor Implication

Core Allocation: Balanced portfolio of global equities, U.S. mid-duration Treasuries, and gold.
Tactics: Use September-related volatility to gradually extend duration.
Hedging:
- Early cut → overweight gold/long-duration bonds.
- Delayed cut → maintain USD longs and credit hedges.

Conclusion

The Fed has made it clear: price stability comes first. Rate cuts will depend heavily on data. The base case is one cut by year-end (Nov–Dec), but a September move is possible if the labor market weakens sharply. For investors, navigating the gap between market expectations and Fed caution is the key to risk management.