Jay Powell’s task: reconcile markets and reality

Knives out. The Federal Reserve has seen the same cracks in the labor market that investors have, and Chairman Jerome Powell has, at last, seen enough. The U.S. central bank has two objectives: control inflation, and support maximum sustainable employment. In an address at the annual monetary policy confab at Jackson Hole, Wyoming, Powell unambiguously laid out the case that price rises are easing, and it is time to support job growth. The market was already banking on swift rate cuts. The Fed might be forced into meeting those expectations.

Before Friday’s speech, futures prices implied that a majority of investors foresaw rates falling by a percentage point or more by year-end. With three meetings left in 2024, that would mean a double-stuffed 50 basis point cut, and soon. Powell did not lay out any precise course of action, pledging to follow the data. Nonetheless, he made it clear that he prizes achieving a so-called soft landing, where inflation falls without a large rise in unemployment, saying that the Fed would “not seek or welcome further cooling in labor market conditions.” The key word is “welcome”—further deterioration, even from leaving rates where they are, will provoke a response.

The labor market has undeniably slowed, with the unemployment rate rising to 4.3% in July from half-century lows of 3.4% in January 2023. Annual revisions to government-collected data released earlier this week show that the economy created 818,000 fewer jobs than previously thought over the year ended in March.

Layoffs, though, remain muted, and inflation is not quite back down to target. Powell and his fellow board of governors must determine how quickly to get to what they deem a neutral rate of interest—neither depressing nor stimulating economic activity. Investors clearly hope that they prioritize speed. But doing so might mean a different kind of disappointment is forcing the issue. In July meeting minutes released Wednesday, Fed staff members noted that recent labor market weakness could portend a “larger-than-anticipated slowdown in aggregate demand growth.”

Back in 2022, Powell used his Jackson Hole speech to signal his determination to choke inflation with rate hikes. He lived up to his promise, with the Fed in a state of patient hawkishness since. This year’s turn signals that he’s reached the endgame, when the prospect of success is near at hand but the possibility of failure is at its most dangerous. To save the labor market, the cuts can’t come soon enough.

Context News

U.S. Federal Reserve Chairman Jerome Powell delivered a scheduled address on the course of monetary policy at an annual symposium held in Jackson Hole, Wyoming on August 23. In his speech, Powell laid out a strategy to bring down interest rates in the months ahead.