Carefully paved the way for a reduction in interest rates in September by the President of the Federal Bank (Fed) of the US, Jerome Powellpointing out the increasing risks to the labor market.
“The stability of the unemployment rate and other labor market indicators allows us to move carefully as we look at changes in the attitude of our policy,” Powell said in a speech prepared for the Fed’s annual conference in Jackson Hall, Wayoming on Friday (22.8.8). “However, with politics in restrictive territory, the basic prospects and the change in the balance of risks may justify the adaptation of our policy attitude.”
Following Powell’s statements, investors have reinforced expectations that the Federal Open Market Committee would reduce interest rates at its meeting on September 16-17.
The careful message comes at a time when Fed officials are divided on how and when they adapt politics in the coming months. Some point out the durability of the labor market. Others warn that the first signs of weakness in employment could be converted into a more important recession.
Powell said the labor market is in a “strange balance” resulting from a significant slowdown in both offering and demanding workers. He referred to July’s employment data, which showed that increasing jobs in recent months was significantly lower than previously mentioned.
“This unusual situation suggests that the risks to employment are growing,” he said. “If these risks are implemented, they can do it quickly in the form of a sharply higher redundancies and increasing unemployment.”
However, he continued to argue that policy makers should be protected from the prospect that President Donald Trump’s duties will lead to persistent inflation. He said the impact of consumer prices are “now clearly visible”, but it is reasonable to expect the effects to be relatively short.
“It is also possible, however, that upward pressure on tariff prices could cause a more constant inflation dynamic, and this is a risk that needs to be evaluated and treated,” Powell said.
“When our goals are in such intensity, our framework requires that we balance both sides of our double mission,” he added.
Government bond yields fell, the S&P 500 continued to make a profit and the dollar fell. Powell welcomed to the audience with the right Ovación from the public.
Powell’s speech comes amid unprecedented pressure from Trump and his allies, with the aim of force the Central Bank to reduce the cost of borrowing, threatening the Fed’s independence in defining monetary policy.
Trump brought his campaign to a new level on Friday. While Powell was talking, the president said he would dismiss Fed Governor Lisa Cook if he did not resign. Trump had already invited Cook to resign because of the allegations that he provided false information when applying for two mortgages. Cook, which is at the Jackson Hall Conference, replied on Wednesday that he had no intention of resigning.
Powell did not refer to the Cook’s case in his statements and did not accept questions from the central bankers and economists.
Changes in the context
The Fed president also described the changes made by officials in the context of monetary policy, the long -term strategy that guides the Fed decisions.
These changes included the clarification of a change made in 2020, which marked that officials would not increase interest rates when the unemployment rate is low in order to prevent inflation.
Powell said policymakers are still agreeing that it may not be necessary to raise interest rates “based solely” with their estimates of where the unemployment rate will be stabilized in the long run. However, he added, the 2020 revision was never intended to “permanently” renounce interest rates when the labor market is strong, pending higher inflation.
In the changes announced on Friday, officials removed the wording previously stated that decisions would be based on their assessment of “lack of employment from its maximum level”. Instead, they adopted a wording that states more specifically, “that employment can occasionally exceed real -time estimates for maximum employment, without necessarily creating a risk
The adaptation indicates less tolerance to a hot labor market, but keeps the Fed’s options open in how it responds.
“Preventive action would probably be justified if the narrowness in the labor market or other factors raise risks to price stability,” he said.
Officials also confirmed their 2% inflation target and the importance of keeping expectations for inflation stable. However, policy -making managers rejected an approach announced in 2020, which provided for inflation tolerance above the target in order to offset the period’s remaining periods. They also removed the wording that characterized low interest rates as a “feature of the economic landscape,” as Powell said.
Public debate on interest rates
Powell’s statements are somewhere among the views expressed by other policy -makers in recent days and weeks.
Cleveland Federal Bank President Beth Hamak said on Thursday that recent inflation data would prevent it from supporting a reduction if officials were meeting this week. Her counterpart from Kansas City, Jeff Smind, was heard equally cautious in an interview broadcast on Thursday, while the president of the federal bank of Atlanta.
Officials reduced interest rates three times towards the end of 2024, but this year they maintained the reference rate unchanged. Powell and other officials were in favor of a patient approach, expressing concern that duties could cause constant inflation. These concerns were confirmed by recent inflation data, which showed that wholesale prices increased
While in June the majority of Fed officials estimated that they would reduce interest rates twice this year, a significant minority provided for only one or no reduction. Since then, the labor market has been weakened, but progress in cooling inflation has also stopped.
Many policy -making managers have highlighted signs of labor market weakness, with some explicitly arguing that the Fed should start lowering interest rates again. Fed commanders Christopher Waller and Michelle Bowman disagreed with the Fed decision in July to maintain interest rates unchanged, citing the labor market.
And after a stunningly weak employment report in July, published a few days later, San Francisco Fed President Mary Daly and Minneapolis Fed Fed Head of NEEL Kashkari marked that they may support a reduction in September.