MNI: Powell Signals Rate Cuts Loom Closer As Job Risks Rise

Federal Reserve Chair Jerome Powell signaled Friday interest rates cuts are nearing, warning that downside risks to the labor market are rising while the tariffs-driven uptick in inflation looks likely to be a one-time adjustment. 

"Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance," he said in his prepared speech at the Kansas City Fed's annual Jackson Hole symposium. 

"Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance." 

Having recalibrates interest rates by 100 bps last year, the Fed now must balance both upside risks to inflation from tariffs and downside risks to employment from a tighter immigration policy and uncertainty over trade and other policies, Powell said. 

SHIFTING RISKS

With a "marked slowing" in both the supply of and demand for workers and rising downside risks to employment, "the balance of risks appears to be shifting," the chair said. 

The labor market has achieved a "curious kind of balance," as labor supply has softened in line with demand, sharply lowering the level of job growth needed to absorb people coming into the workforce, Powell said. 

"This unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment."

GDP growth has also slowed to half that of last year's pace, similarly reflecting slower growth of supply or potential output, he said. 

SHORT-LIVED INFLATION

Monetary policy has focused on whether tariffs-related price increases are likely to turn into an ongoing inflation problem, and "a reasonable base case is that the effects will be relatively short lived — a one-time shift in the price level," Powell said. 

Core PCE inflation likely rose 2.9% in July, higher than where it was last year, he said. The effect of tariffs are "clearly visible," with core goods prices rising 1.1%, compared to a small decline in 2024. 

"It will continue to take time for tariff increases to work their way through supply chains and distribution networks," he said. 

The upward pressure on prices from tariffs could "spur a more lasting inflation dynamic, and that is a risk to be assessed and managed," but the chair suggested that that stable inflation expectations and a less-tight labor market make that outcome less likely.