Federal Reserve Chair Jerome Powell signaled to investors on Friday that the central bank is likely to embark on a cycle of lowering interest rates as soon as September.
But Powell’s speech at the Jackson Hole Economic Symposium suggested that while tariffs have created significant uncertainty about the path for inflation, it’s now the US labor market that bears closer watching from the central bank.
“While the labor market appears to be in balance, it is a curious kind of balance that results from a marked slowing in both the supply of and demand for workers,” Powell said.
“This unusual situation suggests that downside risks to employment are rising,” he added. “And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
The July jobs report, it seems, continues to cause a rethink of the path forward for the US economy.
And how the labor market evolves makes the path ahead for interest rates this year and beyond a particularly rich conversation for Fed officials and investors alike.
The July jobs, published Aug. 1, showed the US economy added 73,000 jobs last month, while some 258,000 jobs were wiped away in revisions to May and June’s data. Following this release, President Trump fired the head of the BLS. Over the last three months, job gains have averaged just 35,000.
Read more: How jobs, inflation, and the Fed are all related
Still, Powell said, this data “does not appear [to show] that the slowdown in job growth has opened up a large margin of slack in the labor market — an outcome we want to avoid.” He also noted that the unemployment rate remains low and has been stable over the last year.
And it was the unemployment rate that a year ago gave Powell and the Fed particular cause for concern.
Powell said Friday that when he spoke at Jackson Hole in August 2024, the US economy was “at an inflection point.”
Inflation was falling, but unemployment was rising at a rate typically associated with recessions. Starting last September, the Fed cut rates by a total of 100 basis points.
This move, Powell said, “[set] the stage for the labor market to remain in balance near maximum employment over the past year.” As of July, the unemployment rate stood at 4.2%, the same as the year prior.
Powell also pointed to indicators like quits, layoffs, and the ratio of vacancies to unemployment as showing the labor market’s stability over the last year. A stability that, again, Powell finds “curious” given the maelstrom of other policy changes weighing on the economic outlook.
“Despite the dual risks to their mandate — potentially higher inflation and higher unemployment — Powell indicated [on Friday] that it was time to focus more on employment than inflation,” said Chris Zaccarelli, chief investment officer at Northlight Asset Management.
‘New challenges’
“This year, the economy has faced new challenges,” Powell said, noting a range of changes in tariffs, immigration, taxes, and regulatory policies.
“There is significant uncertainty about where all of these polices will eventually settle and what their lasting effects on the economy will be,” Powell added. And in Powell’s view, the whole of these uncertainties opens up the potential for structural, rather than cyclical, changes to the US economy.
The latter is what monetary policy is best equipped to combat — lower rates when the economy slows, raise rates when the economy grows faster. On the former, Powell said monetary policy “can do little to alter structural changes.”
Powell essentially vowed Friday that the Fed would not repeat its mistake of 2021 when it held rates low as inflation accelerated, saying the central bank “will not allow a one-time increase in the price level to become an ongoing inflation problem.”
Read more: What Trump’s tariffs mean for the economy and your wallet
In other words, how the Fed can, should, or will react to tariffs is clear. The range of potential outcomes for the labor market — and, in turn, the Fed’s potential responses — is less so.
What we know is that the Fed is likely going to cut rates next month.
As Ryan Sweet, chief US economist at Oxford Economics, wrote Friday: “When Fed chairs open the door for a rate cut, it’s quite difficult to close.”
How long the Fed stays on that path will depend on how the labor market changes in the months ahead. Even if tariff-related pressures are more visible in the inflation and labor data that the Fed and investors watch most closely.
“Unlike other Fed officials,” Sweet added, “Powell is putting greater weight on the employment side of the mandate because of the one-time boost in the price level from tariffs and anchored long-term inflation expectations.”
For Powell and the Fed, then, it seems the uncertainties they know about will shape policy less than the ones they don’t.
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