Jerome Powell Is Right on Inflation and Growth, But He May Still Cut Rates in September

The tensions between U.S. President Donald Trump and Federal Reserve Chair Jerome Powell are well known. Powell has consistently resisted Trump’s demands to cut interest rates, inviting criticism and political pressure. Yet, the irony is that Powell’s cautious stance may be the most accurate reading of the economy.

Despite being proven right on both inflation and growth, Powell may still move toward a symbolic rate cut in September. The reason? In monetary policy, optics can be just as powerful as economics.

What Is Jerome Powell’s Stand?

Powell’s shift became clear between December 2024 and January 2025, when he paused rate cuts and held the Fed funds rate steady. His reasoning was straightforward: tariffs imposed by the U.S. and reciprocal tariffs from trading partners would have a deeper, more structural impact on inflation than on jobs or GDP growth.

He believed that higher tariffs would feed directly into higher import costs and, consequently, higher inflation. This view placed inflation risks at the center of policy, even as political and market pressure mounted for rate cuts.

Powell Is Right on Inflation

The U.S. Bureau of Economic Analysis (BEA) recently reported PCE inflation at 2.6% headline and 2.9% core, both well above the Fed’s 2% target. Core inflation being 90 basis points higher than the target underscores Powell’s concern.

Since April, inflation has risen steadily, with tariffs on Indian and other foreign products adding pressure. Powell’s caution is justified: cutting rates too soon could fuel price rises further.

In short, Powell is right - inflation remains sticky and tariff-driven, making premature rate cuts dangerous.

Powell Is Right on Growth Too

In Q1 2025, U.S. GDP contracted by -0.5%, prompting widespread calls for rate cuts. Powell argued that this contraction was temporary, caused by import front-loading ahead of tariffs. He was vindicated: Q2 estimates showed a rebound to 3.0% and 3.3% growth, proving the economy’s resilience.

The jobs story added another layer. Unemployment rose modestly, and Fed members like Chris Waller and Michelle Bowman urged cuts to support employment. Powell, however, argued that the job losses reflected structural shifts, including AI-driven automation, rather than broad economic weakness. His judgment again aligned with subsequent data.

So, Can We Expect a Rate Cut?

Here lies the paradox. The economic data supports Powell’s case for maintaining status quo. Yet, monetary policy is not just about data - it’s also about perception.

Powell has often been criticized for being “behind the curve.” When inflation was rising, he was seen as late in hiking rates. Now, with inflation sticky but growth steady, he risks being accused of dragging his feet on cuts.

A 25-basis point cut in September would have minimal real impact on the economy. But symbolically, it could signal responsiveness, reassure markets, and reduce political noise. In this sense, Powell may cut rates more for optics than for fundamentals.

Balancing Optics and Economics

Jerome Powell’s analysis of both inflation and growth has proven correct. His cautious approach protects the U.S. economy from tariff-driven price shocks, while acknowledging that growth remains intact.

Still, politics and perception may force his hand. A small rate cut in September would likely be about signaling flexibility, not economic necessity.

For investors, the key takeaway is this: watch not just whether the Fed cuts, but how Powell frames the decision. The language may reveal more about the Fed’s path ahead than the cut itself.

Disclaimer: This article is for informational purposes only and does not constitute financial, investment, or policy advice.