WASHINGTON — Federal Reserve officials have said they are increasingly confident that they almost tamed inflation. Now it’s about the health of the labor market that begins to raise their concerns.
As inflation cools towards the 2% target, the pace of hiring is slowing and the unemployment rate increases slightlyThe Fed is poised to cut its benchmark interest rate from a 23-year high next month. How quickly it cuts rates after that, however, will largely depend on whether employers keep hiring. A lower Fed benchmark rate would ultimately lead to lower interest rates on auto loans, mortgages and other forms of consumer lending.
Chairman Jerome Powell is likely to offer some hints about the Fed’s view of the economy and what its next steps might be in a high-profile speech on Friday. Jackson Hole, Wyomingat the Fed annual conference of central bankersIt is a platform that Powell and his predecessors have often used to signal changes in their thinking or approach.
Powell is likely to signal that the Fed is increasingly confident that inflation will return to its 2% target, which the Fed has long said is necessary before it can begin cutting rates.
Economists generally agree that the Fed is getting closer to overcoming the high inflation that financially hurt millions of households as the economy recovered from the pandemic-induced recession three years ago. But few economists think Powell or any other Fed official is ready to declare mission accomplished.
“I don’t think the Fed needs to be afraid of inflation,” said Tom Porcelli, chief U.S. economist at PGIM Fixed Income. “At this point, it’s right that the Fed is now more focused on labor than on inflation. Their policy is geared to inflation that is much higher than this.”
How quickly the Fed cuts rates in the coming months will depend on what the economic data shows, however. After the government reported this month that Employment in July was much lower than expected and the unemployment rate reached 4.3%the most in three years, stocks fell for two days on fears that the U.S. could fall into a recession. Some economists began speculating that the Fed could cut interest rates by half a point in September and perhaps another similar cut in November.
But healthier economic reports last week, including a new drop in inflation and a solid rise in retailhave largely allayed those concerns. Wall Street traders are now expecting three quarter-point cuts from the Fed in September, November and December, although December is almost a coin toss between a quarter-point cut and a half-point cut. Mortgage rates have already begun to fall in anticipation of a rate cut.
A half-point rate cut by the Fed in September would become more likely if there are signs of a further slowdown in employment, some officials have said. The next jobs report is due on Sept. 6, after the Jackson Hole conference but before the Fed’s next meeting in mid-September.
Raphael Bostic, president of the Fed’s Atlanta office, told The Associated Press in an interview Monday that “evidence of increasing weakness in the labor market may warrant a faster move, either in terms of the increase in the move or the speed at which we try to get back” to a level of interest rates that no longer constrains the economy.
Even if employment remains solid, the Fed will cut rates this year given the steady progress it has made on inflation, economists say. Last week, the government said consumer prices were rising only 2.9% in July Compared to a year ago, this is the smallest increase in more than three years.
Bostic noted that the economy has changed from a few months ago, when he suggested a rate cut might not be needed until the last three months of the year.
“I’m more confident that we’re likely to hit our inflation target,” he said. “And we’ve seen labor markets weaken significantly from where they were last year.” “We may need to adjust policy sooner than I had previously thought.”
Both Bostic and Austan Goolsbee, president of the Fed’s Chicago office, say that as inflation falls, inflation-adjusted interest rates — the most watched by many businesses and investors — are rising, even as inflation has slowed. When the Fed first set its benchmark rate at its current 5.3%, inflation — excluding volatile energy and food costs — was running at 4.7%. Now it’s just 3.2%.
“Our policy is getting tighter every moment in these situations,” Bostic said. “We have to worry” that the tariffs are so high that they could cause an economic slowdown.
Still, Bostic said the labor market and economy look generally healthy for now and that he still expects a “soft landing” with inflation falling back to the Fed’s 2% target without triggering a recession.
With the economic outlook unclear and the Fed focused on future numbers, Powell is unlikely to say much about the central bank’s next steps on Friday.
Given the Fed’s focus on how economic data comes in, “it will be difficult for Powell to commit in advance to a particular trajectory in Jackson Hole,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a research note.