By Howard Schneider
JACKSON HOLE, Wyoming- In 2022, when the Federal Reserve’s focus shifted to combating inflation, it had to ratchet up interest rates fast to get monetary policy caught up with fast-rising prices.
Two years later, the focus has changed again – this time to protecting the job market, as outlined in Fed Chair Jerome Powell’s speech on Friday at the US central bank’s annual Jackson Hole conference in Wyoming. A policy catch-up again appears to be needed – in the other direction, albeit at a likely less frantic speed.
Powell’s signal of coming rate cuts completed a Fed shift that began in January when it acknowledged emerging job market risks, and now it has made countering them its top job.
The open question: Is a weakening job market and rising unemployment rate evidence of an economy settling into a healthy place of steady growth with little upside risk to the jobless rate or part of a slide that will gather speed?
The answer will appear in upcoming employment reports and shape how far and fast the Fed will have to cut rates to prevent what Powell called an “unwelcome further weakening in labor market conditions.”
“We do not seek or welcome further cooling in labor market conditions,” Powell said, remarks that seemed to set the current 4.3 percent unemployment rate as a level he would like to defend as he made the sour admission that “conditions are now less tight than those that prevailed before the pandemic.”
The jobless rate was 4.1 percent and falling when Powell became Fed chief in 2018, falling as low as 3.5 percent in 2019 without raising inflation concerns – conditions Powell said he hoped he could recreate after COVID-19 threw the economy into a tailspin.
The current 5.25 percent -5.50 percent Fed policy rate is seen as restricting the economy and putting jobs at risk and is well above officials’ median estimate of 2.8 percent for the longer-term “neutral” rate. Assuming inflation continues ebbing towards the Fed’s 2 percent target, job market changes will determine how fast officials head toward that neutral level and whether they need to go even lower to restore full employment.
“We’re definitely cooling, but are we cooling to a point where we’re going to level out … or is this just a pit stop to a stronger cool down?” Nela Richardson, the ADP Research Institute’s chief economist, said on the sidelines of the Jackson Hole conference.
Richardson, along with many Fed officials and others in attendance, argues the economy remains strong and is likely just settling to its underlying trends – “normalizing” from the pandemic’s extremes. But the sense of urgency around employment has intensified.
The Fed’s two-year battle against inflation saw rates rise to a quarter-of-a-century high without any appreciable job-market fallout. Fed officials will next meet on Sept. 17-18 on a very different footing than just a few weeks ago as they prepare to cut rates and debate whether the job market is just slowing or at a precipice.
The Fed’s language around risk began steadily changing this year.
Until January, Fed policy statements said officials were “highly attentive” to inflation risks.
Then that month it said “the risks to achieving its employment and inflation goals are moving into better balance.”
