Fed's Powell mum on future interest rate cuts

Andrew Harrer/Bloomberg

• Key insight: Federal Reserve Chair Jerome Powell said the recent uptick in the unemployment rate and slowing job gains were factors that led the central bank's rate-setting committee to cut short-term interest rates by 25 basis points.
• Expert quote: "Our policy is not on a preset course. We will continue to determine the appropriate stance based on the incoming data, the evolving outlook, and the balance of risks," said Federal Reserve Chair Jerome Powell
• What's at stake: The Fed is under heightened pressure from the White House to cut interest rates drastically, and Powell's comments indicate that the central bank is still wary of creeping inflation.

Federal Reserve Chair Jerome Powell again signaled growing concern about a softening labor market, but did not indicate whether the central bank would continue to lower interest rates to spur the labor market in its coming meetings. 

In a speech Tuesday at a luncheon hosted by the Greater Providence Chamber of Commerce in Warwick, Rhode Island, Powell said risk to employment shifted the central bank's monetary policy, justifying the most recent move by the Federal Open Market Committee to lower interest rates by 25 basis points.

Powell said the unemployment rate, though low, has ticked up and job gains have slowed, creating "downside risk for employment." 

"In the labor market, there has been a marked slowing in both the supply of and demand for workers — an unusual and challenging development," said Powell. 

Still, he added that despite some signs of cooling in the labor market, other economic measures remain stable. He pointed to the ratio of job openings to unemployment, which remains near 1, and noted that job openings and initial claims for unemployment insurance have moved sideways.

Powell said the current policy stance of the Fed, which he described as "modestly restrictive," leaves the central bank well positioned to respond to potential economic developments. However, he gave no indication of whether he supports additional interest rate cuts.

"Our policy is not on a preset course," Powell said. "We will continue to determine the appropriate stance based on the incoming data, the evolving outlook, and the balance of risks."

On inflation, Powell said that most long-term expectations remain consistent with the Fed's 2% target, even though short-term indicators point to a possible rise. He also said the economic impacts of changes in trade, immigration and regulatory policy "remain to be seen."

Regarding tariffs, Powell said it is "reasonable" to assume their inflationary effects will be relatively short lived, but emphasized that a "one-time" increase does not mean prices rise "all at once." Instead, he said, the impacts are likely to be felt over time.

"Tariff increases will likely take some time to work their way through supply chains. As a result, this one-time increase in the price level will likely be spread over several quarters and show up as somewhat higher inflation during that period," Powell said.

Powell echoed similar comments from his annual speech in Jackson Hole, Wyoming, in August, saying the central bank's dual mandate goals — maximum employment and stable prices — are in tension, creating a "challenging situation."

"Two-sided risks mean that there is no risk-free path," Powell said. "If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2% inflation. If we maintain restrictive policy too long, the labor market could soften unnecessarily."

Since the FOMC vote in mid- September, at least three committee members have stated that they are open to voting for further short-term interest rate reductions if there are further signs of labor market deterioration.

Most recently, Fed Vice Chair for Supervision Michelle Bowman, warned of "serious risk" to the employment side of the central bank's dual mandate, which may justify steeper short-term interest rate cuts in the near future.

Nine members of the Fed's rate setting committee said in their quarterly economic projections last week that two more 25-basis-point rate cuts remain possible later this year, though another six members viewed September's 25bps cut as the last one for 2025.