Investors and the Federal Reserve have both noticed flaws in the labor market, and Chairman Jerome Powell has finally seen enough. Controlling inflation and promoting maximum sustainable employment are the two goals of the US central bank. Powell made it clear in his speech at the annual monetary policy conference at Jackson Hole, Wyoming, that price increases are slowing down and that it is now appropriate to encourage job creation. The market was already pricing in rapid reductions in interest rates. The Fed may be compelled to live up to those expectations.
Futures prices suggested ahead of Friday's speech that most investors expected rates to drop by at least one percentage point by year's end. That would entail a double-stuffed 50-basis-point cut, and soon, with three meetings remaining in 2024. Powell promised to follow the evidence but did not specify an exact course of action. However, he made it apparent that he would prefer a "soft landing," in which inflation declines without a significant increase in unemployment, and that the Fed would neither pursue nor welcome further contraction of labor market conditions. The term "welcome" is crucial since it indicates that if further deterioration happens, even leaving rates wherever they are will provoke a reaction.
Undoubtedly, the labor market has slowed; in July, the unemployment rate increased to 4.3% from a half-century low of 3.4% in January 2023. The economy generated 818,000 fewer jobs than originally anticipated during the year that ended in March, according to annual revisions to government-collected data that were made public earlier this week.
Inflation has not fully returned to target, and layoffs are still minimal. Powell must decide how soon to reach a neutral rate of interest, which does not stimulate or discourage economic activity, along with his other board members. It is obvious that investors hope they put speed first. However, doing so could indicate that an alternative form of disappointment is pressing the issue at hand. The Fed staff pointed out in meeting minutes from July that the recent weakening of the labor market might herald a more significant slowdown in the expansion of aggregate demand.
Powell expressed his resolve to control inflation through rate increases in his Jackson Hole speech back in 2022. Since then, the Fed has been patiently hawkish, in accordance with his promise. The turn this year indicates that he is closing in on the endgame, when there is a good chance of success but also a high risk of failure. The cuts must occur soon enough to preserve the labor market.