Federal Reserve Chair Jerome Powell said on Tuesday the central bank must continue weighing the twin challenges of high inflation and a cooling labour market as policymakers debate how quickly to cut interest rates.
“Near-term risks to inflation are tilted to the upside and risks to employment to the downside – a challenging situation,” Powell said, sticking closely to the language used last week when the Fed reduced its benchmark rate by a quarter point.
The federal funds rate, now at 4% to 4.25%, remains restrictive enough to keep pressure on inflation, but leaves the Fed well positioned to respond to potential economic developments.
"Our policy is not on a preset course,” Powell said.
While that phrase is a familiar refrain among central bankers, it has taken on added weight as divisions within the Fed widen.
Earlier on Tuesday, Fed Vice Chair for Supervision Michelle Bowman argued for quicker and more decisive easing to protect a labour market she fears could deteriorate further. “It’s a lot easier to support the labor market by lowering the federal funds rate than it is to fix it after it’s broken,” she said.
With the unemployment rate at 4.3%, Bowman said slowing hiring was enough to justify action. “It is time for the Committee to act decisively and proactively to address decreasing labor market dynamism and emerging signs of fragility,” she added.
By contrast, some regional Fed presidents counselled caution. Chicago Fed President Austan Goolsbee told CNBC: “With inflation having been over the target for 4½ years in a row and rising, I think we need to be a little careful with getting all really up-front aggressive.”
Markets largely expect further cuts, with the CME Group FedWatch Tool investors pricing in a 94.1% chance of another quarter-point move at the Fed’s October 28–29 meeting.
For now, Powell is steering a middle course and reiterating the need to assess upcoming jobs and inflation data.
In prepared remarks to the Greater Providence Chamber of Commerce in Rhode Island, Powell said there was danger in both acting too quickly and too slowly.
“If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore two percent inflation. If we maintain restrictive policy too long, the labor market could soften unnecessarily,” he said.
Powell acknowledged concerns about the jobs outlook, noting that recent monthly job growth has averaged just 25,000, below the “breakeven” pace needed to stabilise unemployment.
Still, he said other labour indicators remain “broadly stable”. Inflation, meanwhile, is “somewhat elevated”, with tariffs pushing goods prices higher.
“It will take time”, Powell said, but the Fed must “make sure that this one-time increase in prices does not become an ongoing inflation problem”.
He also addressed asset markets, saying that equities and other risk assets appear expensive. “We do look at overall financial conditions, and we ask ourselves whether our policies are affecting financial conditions in a way that is what we’re trying to achieve,” Powell said.
“But you’re right, by many measures, for example, equity prices are fairly highly valued.”
