The Chair of the Federal Reserve, Jerome Powell, hinted that there is no guarantee of a rate cut in the coming months. He stated that the Federal Reserve faces a “daunting situation” in deciding whether to prioritize addressing inflation or protecting employment.
At the same time, Powell also warned that maintaining “restrictive” rates in the long term could mean that the labor market may unnecessarily weaken.
Speaking at an event in Providence, Rhode Island on Tuesday, Powell reiterated his views from the press conference last week.
He said, “In the short term, the risks to inflation are tilted to the upside, while the risks to employment are tilted to the downside. This is a challenging situation.”
He emphasized that with the Federal Reserve’s dual mandate of price stability and full employment in such a tense state, the policy framework requires the Fed to strike a balance between the two.
Powell acknowledged that even after the 25 basis point rate cut last week, the Fed’s rate stance still falls within a moderately restrictive range.
“The dual risks mean there is no risk-free path.” Powell said. He noted that cutting rates too much or too quickly could lead to inflation continuing to approach 3%, instead of dropping back to the Fed’s long-term target of 2%; while maintaining restrictive rates in the long term could unnecessarily weaken the labor market.
Regarding the Fed’s next meeting on October 28-29, Powell avoided making strong suggestions, but did not strongly oppose the market’s widespread expectation of another rate cut.
He pointed out that officials will be focusing on economic growth, employment, and inflation data, and will question themselves, “Is our policy correct? If not, we adjust our policy.”
Powell also reiterated that tariff hikes could lead to one-time price increases, which may take time to manifest in the supply chain. “One-time increases do not mean all at once,” he said.
Many forecasters believe that the price increases related to tariffs will not persist, but Powell has consistently disagreed with this view. He stated that the Fed has a special responsibility and cannot ignore the price increases caused by tariffs.
The Wall Street Journal reported that Powell’s remarks were subtly pushing back against the view of implementing larger rate cuts without signs of economic deterioration. However, if Fed officials continue to assess that the recent weakness in the labor market outweighs the decline in inflation, there may be more room for rate cuts later this year.
In the projections submitted at last week’s meeting, slightly more than half of Fed officials expect at least two more rate cuts in 2025, meaning the Fed could cut rates consecutively at the remaining October and December meetings.