Federal Reserve Chair Jerome Powell on Friday said that the “balance of risks appears to be shifting” in the U.S. economy, as central bank policymakers weigh labor market conditions and inflation data ahead of their next interest rate decision in mid-September.
Powell spoke at the annual monetary policy conference hosted by the Kansas City Fed in Jackson Hole, Wyoming, in what is expected to be his final address at the event as Fed chair. The event comes following a series of inflation prints showing consumer prices trending higher and further away from the Fed’s 2% target, as well as a weaker-than-expected July jobs report that included large downward revisions to employment in May and June.
The Federal Reserve chairman said that downside risks to the labor market appear to be rising while economic growth slowed in the first half of the year due to slower consumer spending, and added that tariffs have begun to push consumer prices higher – raising the risk of higher inflation, though longer-term inflation expectations are still well-anchored.
“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,” Powell said. “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.”
POWELL FACES ECONOMIC CROSSROADS IN JACKSON HOLE SPEECH AS FED CHAIR TENURE NEARS END
“The effects of tariffs on consumer prices are now clearly visible. We expect those effects to accumulate over coming months, with high uncertainty about both timing and amounts. The question that matters for monetary policy is whether these price increases are likely to materially raise the risk of an ongoing inflation problem,” Powell said.
“A reasonable base case is that the effects will be relatively short-lived, a one-time shift in the price level. Of course, one time does not mean all at once. It will continue to take time for tariff increases to work their way through supply chains and distribution networks. Moreover, tariff rates continue to evolve, potentially prolonging the adjustment process,” he said.
“It’s also possible, however, that the upward pressure on prices front tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed.”
TOP ECONOMIST SAYS TWO CONTENDERS TO REPLACE FED CHAIR POWELL STAND OUT
Powell said that the risk of a wage-price spiral driven by workers requesting and receiving higher wages to offset the impact of higher prices on household budgets appears low, given the softening labor market conditions. He added that inflation expectations over the longer-term have remained “well-anchored and consistent with our longer-run inflation objective of 2%.”
“Of course, we cannot allow the stability of inflation expectations for granted. Come what may, we will not allow a one-time increase in the price level to become an ongoing inflation problem,” Powell added.
“So putting the pieces together, what are the implications for monetary policy? In the near term, risks to inflation are tilted to the upside and risks to employment to the downside – a challenging situation. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate,” he said.
TRUMP SLAMS POWELL AS ‘MORON’ AND CALLS FOR FED’S BOARD TO TAKE CONTROL OF POLICY MOVES
Powell noted that after the Federal Open Market Committee (FOMC) lowered the benchmark federal funds rate by 100 basis points last year, the Fed has room to maneuver as it brings rates back to a neutral level with the labor market still showing signs of durability based on some metrics.
“Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance,” he explained. “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
“Monetary policy is not on a preset course. FOMC members will make these decisions based solely on their assessment of the data and its implications for the economic outlook and the balance of risks. We will never deviate from that approach,” Powell said.
TREASURY’S BESSENT SAYS INTERVIEWS FOR POTENTIAL FED CHAIRS WILL START AROUND LABOR DAY
The stock market rallied in response to Powell’s speech, with major indexes up over 1% as expectations for a September interest rate cut rose.
“Labor-market weakness appears to have outweighed inflation risk for the Fed, and the markets’ initial response speaks for itself,” said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management. “Longer term, the debate about how far and fast the Fed will cut rates is just beginning. Chairman Powell reaffirmed the 2% inflation target, and with tariffs still working their way through the economy, the Fed avoided declaring victory on that portion of its mandate.”
Seema Shah, chief global strategist at Principal Asset Management, said that while Powell’s speech “clearly leaned dovish, his remarks signal that a 25-basis-point cut is valid, but a 50-basis-point cut is not.”
“Certainly, while the case for easing has strengthened, there is little economic justification for an emergency-sized 50 basis point cut. Should the Fed opt for such a move, markets may interpret it as a sign of political influence rather than data-driven decision-making. This could push inflation expectations and term premia higher, driving long-end yields up and undermining the very conditions that have support risk assets,” Shah explained.
Futures markets showed the odds of a 25-basis-point cut trended higher following Powell’s speech, rising from 75% yesterday to 89.2% after Powell’s speech, according to the CME FedWatch tool. The odds of rates staying at the current range of 4.25% to 4.5% fell from 25% yesterday to 10.8% after the speech, while the probability of a 50-basis-point cut remained at zero.
Read the full article here
