Jerome Powell, Chair of the Federal Reserve, encouraged a wait-and-see approach in his recent press conference. His comments captured the paradoxical forces at play right now in the U.S. economy. His comments focused more on the state of the labor market, discussing how further easing may be needed to address these vulnerabilities. Powell’s apparent caution belies the underlying tightrope walk. As the FOMC is acutely aware, it is a very fine balance between creating jobs—and indeed, maintaining wage increases—and combating inflation.
And in that same March 2018 press conference, Powell indicated that the Fed would need to do two percentage points of further tightening. The desired effect of this action is to increase the economy’s resilience to unexpected shocks. He clearly positioned jobs as the main focus of his speech. That especially underscored the importance of staying the course on a strong labor market, given that economic fragility was clearly increasing.
Employment at the Forefront
Powell’s focus on employment is especially timely considering that we are in the midst of one of the worst economic conditions. This was a point of strong concern for Vice Chair for Supervision Michelle Bowman. She argued that the FOMC is still missing the mark in supporting maximum job creation. She urged her fellow policymakers to act “decisively and proactively” to avert potential risks that could arise from a weakening labor market.
He pointed to last week’s decision to reduce rates as the right call, with indications of a cooling job market. This recognition of a new and uncertain economic reality goes to the heart of the case for urgency with which the Fed must make its choices. Powell is committed to advancing equity in employment. He warns against strong easing too as inflation numbers are still well above the Fed’s target range.
Whether intentional or not, these discussions signal a burgeoning awareness of the consequences and trade-offs of monetary policy. To address urgent needs, we need to dramatically increase the number of jobs created. Separately, though, we have grave inflationary risks that could jeopardize our long-term economic health.
Navigating Risks and Projections
Looking ahead, Powell projected that policymakers expect one more 0.5 percentage point cut in interest rates. We expect this amendment to be made reality by the end of the year. As a result, our median rate forecast for 2024 has been moved down slightly to 3.6%. Additionally, growth expectations have been lifted slightly to 1.6%. This provides a new and moderate signal of optimism regarding the economic outlook, as well as the recognition that uncertainties remain very much in play.
Powell emphasized that risks are starting to be more two-sided. This points to the Fed nearing a neutral monetary policy demeanor. We have made some progress, but there isn’t much of an appetite to blow things up and start over. Rather, he advocates for a slower, deliberate and studied approach to policy changes.
Chicago Fed President Austan Goolsbee helped jumpstart this new approach by urging fresh thinking about what’s possible. He thinks the Fed should be ready to cut rates if inflation continues to go down. His observation captures Powell’s dovish attitude perfectly. They point to a deeper agreement within the policy establishment on the need to continue watching employment and inflation trends closely.
Market Reactions and Future Expectations
Smart markets have begun to take these subtleties into account. They read Powell’s language and the current FOMC mood as indications that cuts could be coming. Market analysts are betting on at least two additional rate cuts. One is expected in October, and the second in December, as investors brace themselves for a shift to tighter monetary policy.
That’s not a crazy move considering futures markets are currently pricing in around 40 basis points of easing by year end. They too predict a cut of just shy of a full percentage point by the end of 2026. These projections underscore an underlying belief among investors that the Fed will continue to navigate its dual mandate carefully, balancing employment growth against inflation control.