Jerome Powell, the Chair of the Federal Reserve, has been chased with pitchforks—and rightfully so—for the central bank’s tough love actions to control inflation. This criticism is particularly cutting given that it comes from inside the White House. In a speech last week, Powell admitted that there has been a large shift between demand for and supply of labor. This has led many, including us, to speculate about a future characterized by economic stagnation.
In meetings with Powell, we found every shade of opinion between Federal Reserve Board members. Yet they maintain different views on the direction of future monetary policy. Despite the pushback from all sides, he says he’s still optimistic about the policy direction today. He explained, “This policy posture— which I consider to be still modestly restrictive — leaves us well placed to react to whatever economic developments might come.”
Powell noted that inflation has dramatically cooled since reaching a 40-year high in 2022. That said, it remains comfortably over the Fed’s 2% target. This was an admission that uncertainty about future inflation direction still holds significant sway. “Uncertainty around the path of inflation remains high,” he stated, underscoring the challenges the Fed faces in navigating its dual mandate of achieving stable prices and low unemployment.
The labor market was clearly in distress, with payroll growth averaging less than 30,000 jobs per month over the summer period. Further increasing the complication of the economic landscape were monthly benchmark revisions that admitted to almost one million fewer jobs created in the preceding twelve months. Powell said the following conditions were aligned with stagflation, which is characterized by an economic growth slowdown paired with high inflation.
In view of these changes, Powell highlighted that the Federal Open Market Committee (FOMC) stands prepared to entertain additional rate reductions. If they find that more accommodative policies are warranted, they’ll act. “Near-term risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation,” he said, reflecting on the delicate balance the Fed must strike.
Michelle Bowman, a member of Fed’s board, cited the importance of acting quickly to cool down a troubled labor market. She warned that “we are at serious risk of already being behind the curve in addressing deteriorating labor market conditions.” Bowman thinks the Fed’s recent actions represent “the first step” to getting to a neutral level of interest rates. She’s hopeful when she sees the potential of these policy decisions.
In the course of these exchanges, Powell avoided committing to any specific forecast of where rates are headed next. He reiterated the complexities involved, stating, “Two-sided risks mean that there is no risk-free path.” This well overdue recognition captures the pain of trying to stabilize an economy plagued by both persistent inflation and a rapid deceleration in growth.
As Powell continues to steer through this economic fog, he is still determined to bring the hawk and dove sides of the dual mandate into equilibrium. We know that the White House is watching what happens very closely. It is actively negotiating with other major U.S. trading partners on tariff levels, with particularly important deadline arriving at the beginning of November regarding trade relations with China.