Federal Reserve Chair Jerome Powell, in a speech before the Greater Providence Chamber of Commerce in Warwick, Rhode Island yesterday, delivered an updated economic outlook Tuesday, describing rates as “modestly restrictive” and warned of competing pressures from employment and inflation.
Highlighting the challenging balance between controlling inflation and supporting employment, Powell emphasized that policy decisions now carry significant risks, regardless of direction.
“Two-sided risks mean that there is no risk-free path. If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2% inflation,” Powell said. “If we maintain restrictive policy too long, the labor market could soften unnecessarily.”
At the Federal Open Market Committee’s (FOMC) latest meeting in September, Fed governors made the decision to cut interest rates by 25 basis points to a range of 4-4.25%, reflecting what Powell described as a shift towards a more neutral policy.
“This policy stance, which I personally see as still modestly restrictive, leaves us well positioned to respond to potential economic developments,” Powell said.
In the Fed’s latest dot plot, two additional rate cuts are still in the cards for the remainder of the year. The next FOMC meeting is scheduled for Oct. 28-29.
“We didn’t want to cut too early,” Powell said. “If we cut too early, we may find out in a year that inflation actually wasn’t under control and it’s back up to three and half or four percent; no one thinks this is the base case, but that’s the risk of cutting too early or too much.”
When you cut too late, the risk is that the labor market weakens unnecessarily, he explained.
Further drilling down on the challenges facing the economy today, Powell explained how employment and inflation are presenting conflicting signals for monetary policy.
“There’s no risk-free path; it’s a very difficult policy environment when your two goals are telling you two different things,” Powell told the audience. “They’re coming into closer balance…(w)e do see meaningful weakness in the labor market now—very low job creation. The unemployment rate is still low though and the quits rate is low. A lot of things suggest that the labor market has reached an unusual stability of much lower demand and much lower supply for workers. It’s a really unusual kind of a balance, but nonetheless, we think it’s a downside risk.”
Seemingly addressing President Trump’s and Federal Housing Finance Agency (FHFA) Director Bill Pulte’s comments about the Fed chair being political, Powell cleared the air and said the Fed doesn’t ever think about politics whenever they make decisions.
“We’re just not looking at things that way; we’re looking at what’s the best thing for the people that we serve, in the medium term. What’s the best policy? And many don’t believe us…but the truth is, most of these people who are calling us political—it’s just a cheap shot,” Powell said.
