MNI FED WATCH: Fed On Easing Path As Job Market Risks Mount

A rising risk of worsening employment conditions prompted the Federal Reserve Wednesday to begin moving toward a more neutral monetary policy even as inflation is expected to remain above target through next year, Fed Chair Jerome Powell said Wednesday after the FOMC resumed rate cuts for the first time since December.    

"The labor market has softened. The case for there being a persistent inflation outbreak is less. So that's why we think it's time for us really to acknowledge that the risks to the other mandate have grown and that we should move in the direction of neutral," Powell told reporters. 

The FOMC lowered its benchmark fed funds rate target by 25 basis points to a 4-4.25% range Wednesday and the median official penciled in two more cuts to end the year, matching market expectations. 

That outcome isn't guaranteed, Powell cautioned. Though 10 out of 19 officials wrote down two or more cuts for the remainder of the year, nine wrote down fewer cuts, he noted. 

"We're in a meeting by meeting situation," he said. "There are different possible outcomes and likelihoods." (See: MNI INTERVIEW: Fed Easing Constrained By High Inflation-Sahm)

WEAK DEMAND

After months of agitation from President Donald Trump to slash interest rates on the basis that tariffs aren't inflationary, it was slowing immigration and a loss of dynamism in the labor market as growth has slowed that finally prompted the Fed to act.   

The unemployment rate edged up to 4.3% in August and is expected to spend the next year or so around 4.4%-4.5%, according to updated FOMC projections Wednesday. Payroll job gains have slowed significantly to a three-month average pace of just 29,000, which Powell said is below the breakeven rate needed to hold the jobless rate steady.  

"A good part of the slowing likely reflects a decline in the growth of the labor force, due to lower immigration and lower labor force participation," Powell said. 

Still, labor demand has softened as well, he said. "The economy has slowed down, so it's probably a number of things," he said, adding AI could be a factor but is not the main driver.  

Acknowledging the myriad challenges facing the Bureau of Labor Statistics, Powell said he remained confident in official employment data. Annual revisions to payroll estimates that nearly halved the rate of job creation in the year through March was "almost exactly what we expected," and slow response rates to BLS surveys just mean the most accurate data comes a little later, he said. 

'NOT OBVIOUS'

The median FOMC official marked up his or her estimate for headline and core inflation next year by two-tenths to 2.6% in the latest set of forecasts, and Powell said higher goods inflation as a result of tariffs is expected to be short-lived. 

"The pass-through of the tariffs into inflation has been slower and smaller," he said. Headline and core PCE inflation, currently at 2.7% and 2.9%, respectively, are expected to peak around 3% this year. 

"We continue to expect it to move up, maybe not as high as we would have expected it to move up a few months ago," Powell said. 

With risks to inflation tilted to the upside and risks to employment to the downside, "there’s no risk-free path now. It’s not obvious what to do," Powell said. 

INDEPENDENCE QUESTIONED

A dissent in favor of a larger 50 bp cut at this meeting, and a projection for rates far lower than others prompted questions over growing influence on the central bank from the White House. Trump's Council of Economic Advisers chair Stephen Miran, now on temporary leave from the administration, was sworn in as Fed governor Tuesday and was the lone dissenter to Wednesday's decision.      

"There wasn't widespread support at all for a 50 basis point cut today," Powell said. "The committee remains united in pursuing our dual mandate goals. We're strongly committed to maintaining our independence." (See: MNI INTERVIEW: Cook Could Face Long Odds Before Supreme Court)