MNI: Fed's Powell Continues To Be Worried About Labor Market

Federal Reserve Chair Jerome Powell said Tuesday risks to the U.S. labor market appear to have risen, making it a more immediate concern for monetary policy than the tariff-driven increase in goods prices. 

Key jobs and inflation data have been delayed due to the federal government shutdown, but available public and private-sector data and accounts from business contacts suggest both firms' and households' opinions of the labor market are trending down while increases in goods price primarily reflect tariffs rather than broader inflationary pressures, Powell said. 

"Based on the data that we do have, it is fair to say that the outlook for employment and inflation does not appear to have changed much since our September meeting four weeks ago," he said in remarks prepared for a National Association for Business Economics meeting in Philadelphia. 

"Rising downside risks to employment have shifted our assessment of the balance of risks," underpinning the Fed's first rate cut of the year last month, he said. 

COMMITTEE DIVIDED

But with the dual mandate goals in tension, Fed policymakers are divided on the outlook, Powell said. 

"There is no risk-free path for policy as we navigate the tension between our employment and inflation goals. This challenge was evident in the dispersion of Committee participants’ projections at the September meeting," he said. 

The projections showed nine officials favored two more cuts to end the year and another nine saw fewer cuts needed. 

"I will stress again that these projections should be understood as representing a range of potential outcomes whose probabilities evolve as new information informs our meeting-by-meeting approach to policymaking. We will set policy based on the evolution of the economic outlook and the balance of risks, rather than following a predetermined path." (See: MNI POLICY: Fed Set To Keep Cutting Rates Despite Missing Data)

BALANCE SHEET

Alongside his comments on the economic outlook, Powell signaled QT may come to an end in the near future as reserves shrink to just above ample levels. 

"Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions. We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision," he said. 

A general firming of repo rates and temporary pressures on certain dates are signs that liquidity conditions are gradually tightening, he said. 

The FOMC is set to discuss the longer-run composition of the Fed's asset holdings, which are currently weighted toward longer dated maturities and contain USD2.1 trillion of mortgage securities, Powell said. The Fed aims for a portfolio consisting primarily of Treasury securities over the longer run and has discussed selling MBS to accelerate that progress, he noted. 

"Transition to our desired composition will occur gradually and predictably, giving market participants time to adjust and minimizing the risk of market disruption." 

Powell said the Fed's ample reserves regime has proven remarkably effective for implementing monetary policy and supporting economic and financial stability. He also said if the central bank lost the ability to pay interest on reserves and other liabilities were eliminated, the "Fed would lose control over rates."