In a recent address, Federal Reserve Chair Jerome Powell offered a refreshingly frank assessment of our economy. He emphasized the stagflationary impact, evidenced by a deteriorating labor market outlook and inflation still considered “somewhat elevated.” With this action, the Federal Reserve took an unprecedented step. They cut the target range for the federal funds rate by 25 basis points. It currently sits at 4% to 4.25% after Powell emphasized the need for a more neutral policy position with the increasing clouds on the horizon.
Powell admitted that the job market is no longer “rock solid.” This is a testament to the incredibly tight labor market that workers and employers are struggling with right now. He noted the balancing act that policymakers must perform, stating, “Near-term risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation.” This recognition is more than just reassuring signage, as the Fed now faces mounting inflation pressures that run counter to the need to protect against recessionary job losses.
The Federal Reserve’s latest adjustments come in light of what Powell described as “increased downside risks to employment,” which have altered the landscape for achieving the central bank’s dual mandate of price stability and maximum employment. He remarked on the necessity of carefully navigating these issues, stating, “We will continue to determine the appropriate stance based on the incoming data, the evolving outlook, and the balance of risks.”
Powell’s statements paint a good picture of the contradictory and confusing economic learning experience we find ourselves in today. He cautioned that a too vigorous monetary easing would risk not dealing with the inflation problem. This could mean a future tightening beyond what would be needed to achieve the targeted inflation rate of 2%. On the other hand, he warned that keeping tight policies in place for too long would risk a premature and avoidable softening of the labor market.
In an unambiguous signal of the Fed Chair’s worries about inflation, Powell reiterated that policy is still “modestly restrictive.” He was clear that charting a proper path to the challenges that lie ahead involves risk. This touches on the difficult line that government leaders and economic interests must walk.
“The increased downside risks to employment have shifted the balance of risks to achieving our goals,” he explained. The Fed has moved fast, lowering interest rates. This decision reflects their conviction that a higher, more neutral path is appropriate given the renewed strength in economic indicators. This strategy hopes to thread the needle between keeping the economy growing and inflation in check.
As he wrapped up his remarks, Powell once again stressed the need to watch the economy and pivot economic policy as data evolves. “If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2 percent inflation,” he warned. “When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.”