Key Points

  • Federal Reserve Chair Jerome Powell said Tuesday that the central bank should pay more attention to a solid job market rather than only ensuring price stability, while also noting that risks from rising unemployment and higher inflation are increasing.
  • Powell said economic trends are pushing policymakers in opposite directions, noting that tariffs, the highest since 1933, have so far raised inflation by about 0.4 percentage points, while average monthly job gains have fallen to just 29,000 since June.
  • "Near-term inflation risks are tilted to the upside, and employment risks are tilted to the downside—this is a challenging situation," Powell said, adding that "two-sided risks mean there is no risk-free path." Nevertheless, while noting that the Fed's multi-year effort to restore price stability is not yet complete, Powell also said that "the tight-inflation policy stance does need to ease, shifting to a more balanced approach."

In-Depth Analysis

Policymakers cut the federal funds rate by 25 basis points to a range of 4% to 4.25% on September 17, marking the first reduction in borrowing costs this year.

At the post-meeting press conference, Powell described the decision as a "risk-management rate cut" aimed at boosting the job market.

"Both sides of the labor market—supply and demand—have shown a clear slowdown, which is an unusual and challenging development," Powell said Tuesday. "In this less dynamic and somewhat weaker labor market, downside risks to employment have risen."

Fed Governors Michelle Bowman and Stephen Miran issued stronger warnings about the deteriorating employment situation.

"Now that we have seen labor market conditions deteriorate for several consecutive months, it is time for the Committee to take decisive and proactive action to address the declining dynamism and emerging signs of fragility in the labor market," Bowman said in a speech Tuesday, referring to the Federal Open Market Committee, which sets monetary policy.

The unemployment rate rose to 4.3% in August from 4.2% in July.

"In my view, recent data, including the estimated benchmark revision to payroll employment, show that we face a serious risk of already falling behind in addressing the deterioration in labor market conditions," Bowman said. "If these conditions persist, I fear we will need to adjust policy at a faster pace and by a larger magnitude."

Miran, on Monday, downplayed the risk of tariff-driven inflation and called for two 50-basis-point rate cuts in the next quarter to avoid a further rise in unemployment.

"Monetary policy has moved deeply into restrictive territory," Miran said in a speech at the Economic Club of New York. "Keeping short-term rates about 2 percentage points above neutral could trigger unnecessary layoffs and higher unemployment."

Fed officials projected at their meeting last week that there would be two more 25-basis-point rate cuts this year.

In the median forecast, they expect the federal funds rate to fall to 3.6% by the end of 2025, 0.3 percentage points lower than the June projection.

Powell emphasized Tuesday that policymakers, while seeking to avoid further weakness in the job market, will not neglect their other congressionally mandated duty—ensuring price stability.

Powell said the Fed's preferred inflation gauge—the personal consumption expenditures index, which excludes volatile food and energy prices—rose 2.9% year over year last month, higher than the level 12 months earlier. Policymakers have committed to keeping inflation at 2% over the long term.

Tariffs may temporarily push up prices, but "a one-time increase does not mean a 'one-time all-at-once increase'," Powell said. He predicted that import tariffs would accelerate inflation "to some extent" over the coming quarters.

"We will ensure that this one-time increase in prices does not turn into a persistent inflation problem," he said.