Powell: The Fed does not have a ‘risk-free path’ as unemployment and inflation rise
Federal Reserve Chairman Jerome Powell warned on Tuesday that the US economy faces serious threats regardless of the approach the central bank takes to lowering interest rates.
In a speech on Tuesday, Powell said the Fed is trying to balance a weak labor market and high inflation as it plots an interest rate plan, but faces obstacles on both sides.
“There is no risk-free path for policy as we deal with the tension between employment and inflation targets,” Powell said at the National Association for Business Economics (NABE) conference in Philadelphia.
The Fed is responsible for maximizing employment while keeping inflation as close to 2% annually as possible, a dynamic known as the “dual mandate.” The bank typically does this by lowering interest rates to stimulate the economy when unemployment rates rise, and raising interest rates to slow the economy when inflation rises.
However, the Fed is facing both problems at the same time — a rare and complex problem for the bank to grapple with, especially with interest rates already reaching levels that could slow the economy.
The job market in the United States has slowed significantly since the beginning of the year, with the country adding an average of only 29,000 jobs per month. The unemployment rate rose to 4.3% from 4% in January, and the hiring rate slowed to levels not seen since the COVID-19 pandemic.
Inflation also rose throughout the year as tariffs imposed by President Trump raised the costs of key goods. Prices have risen about 3 percent over the past year, well above the Federal Reserve’s target of 2 percent.
“While official September employment data is delayed, available evidence suggests that layoffs and hiring remain low, and that households’ perceptions of job availability and businesses’ perceptions of hiring difficulty continue their downward trajectories,” Powell said.
High inflation derailed the Federal Reserve’s plans to cut interest rates during the beginning of the year, angering Trump. But the Federal Reserve changed course last month, cutting interest rates to stave off growing risks to the labor market.
Powell’s comments come two weeks before the Federal Reserve’s next policy meeting, where officials are expected to cut interest rates again. Powell and his colleagues will have to make that final judgment without the latest federal employment data due to the government shutdown.
“Based on the data we have, it’s fair to say that employment and inflation expectations do not appear to have changed much since our September meeting four weeks ago. The data available before the shutdown show that economic activity growth may be on a somewhat stronger path than expected,” Powell said, underscoring the struggle the Fed faces.
