Fed Chair Powell is Getting Equally Worried About The Job Market And Inflation

For the past two years, policymakers at the Federal Reserve have been focused on the “inflation” side of the central bank’s two-part mission of keeping prices stable while keeping employment high. As the labor market slows, that’s starting to change.

In testimony before the Senate Banking Committee Tuesday, Federal Reserve Chair Jerome Powell acknowledged that the central bank is now paying just as much attention to the slowing labor market as it is to inflation that is still running above the Fed’s target of a 2% annual growth rate. 

Inflation Trends Lower, Unemployment Rises

Consumer prices are forecast to have risen 3.1% over the year in June according to the Consumer Price Index, a downtick from the 3.3% rate in May, while the unemployment rate edged up to 4.1% from 4% over the same period, a report last week showed. That rate is low by historic standards, but more than half a percentage point higher than the low hit in April.

With unemployment rising and inflation still too high, the Fed is in a precarious position as it tries to set its key interest rate high enough to discourage spending enough to slow inflation, but not so high that it causes massive job losses.

“The latest data do show that we’ve had considerable cooling in the labor market,” Powell said. “We’re very much aware that we have two-sided risks now … we’re determined to balance those as best we can.”

Powell’s remarks highlighted the difficulty the Fed faces as it tries to fulfill its purpose under the law—the “dual mandate” given to it by Congress in 1977 to keep the economy at “maximum employment” while also keeping a lid on inflation. 

As inflation surged to a four-decade high starting in 2022, the Fed raised its benchmark interest rate, pushing up borrowing costs on all kinds of loans, to discourage borrowing and spending and bring supply and demand back into balance so price increases would decelerate. The central bank has held the rate at a 23-year high since last July and now faces the decision of when to start lowering the rate again so that the economy doesn’t stall out.

Still No Timeline For Rate Cuts

Powell avoided hinting at when those rate cuts might come, sticking to the message he has sent for months that he would need to see more good data on inflation before he was confident inflation was firmly on a path down to a 2% annual rate.

Senator John Kennedy, a Republican from Louisiana, asked Powell outright: “When are you going to lower interest rates?”

“I’m today not going to be sending any signals about the timing of any future actions,” Powell replied. 

The exchange was one of several points where Powell sidestepped questions that would have signaled the Fed’s future plans, or involved political controversies. 

Powell’s refusal to be pinned down earned praise from at least one Senator.

“You have one of those jobs where being boring is one of the most noble things you can be,” said North Dakota Republican Kevin Cramer. “So, great job.”

Powell Defends Fed’s Independence

Powell did touch on politics if only to say that the Fed should stay out of them and that politics should stay out of the Fed’s decisions. 

Democratic senator Catherine Cortez Masto asked Powell about proposals reported by the Wall Street Journal to be circulated by members of former president Donald Trump’s advisors, which would give the White House control over the Fed’s interest rate decisions if Trump is elected again.

Powell said the Fed needed to stay independent from political influence. 

“It’s literally essential,” Powell said. “The good news is I think that’s well understood, particularly on Capitol Hill, on both sides of the aisle.”