By Howard Schneider
WASHINGTON (Reuters) -U.S. Federal Reserve Chair Jerome Powell said on Tuesday the central bank is in a “challenging situation” with an ongoing risk of faster-than-expected inflation at the same time that weak job growth has raised concern about the health of the labor market.
In comments prepared for delivery to Rhode Island’s Greater Providence Chamber of Commerce, Powell offered little indication of when he thinks the Fed might next cut interest rates, noting that there was danger to both cutting too fast and risking a new surge of inflation, or reducing rates too slowly and possibly causing unemployment to rise unnecessarily.
“Near-term risks to inflation are tilted to the upside and risks to employment to the downside – a challenging situation,” Powell said, repeating language used last week when the central bank cut its benchmark rate a quarter of a percentage point. The current rate, in the range of 4% to 4.25%, is still considered high enough to lean against price pressures in the economy, but “leaves us well positioned to respond to potential economic developments. Our policy is not on a preset course.”
While that phrase is something of a mantra for Fed officials, it has taken on particular resonance now, with strong opinions emerging on both side of the policy divide. Earlier this week several regional Reserve Bank presidents called for caution in further cuts, seeing the balance of risks still tilted towards inflation, while two Fed governors warned that policy is too tight and more cuts needed to protect the job market.
Fed policymakers at the median anticipate quarter-point reductions at the Fed’s October and December meetings, and investors expect with a high probability that they will follow through.
But, “if we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore two percent inflation. If we maintain restrictive policy too long, the labor market could soften unnecessarily,” Powell said.
Powell agreed there is reason to be concerned about the job market, with recent job growth averaging around 25,000 for the past three months “running below the ‘breakeven’ rate needed to hold the unemployment rate constant.”
But other job indicators were “broadly stable,” he said.
Inflation meanwhile remained “somewhat elevated,” with tariffs driving goods prices higher. While that impact will likely fade, he said, it will take time, and it was up to the Fed to “make sure that this one-time increase in prices does not become an ongoing inflation problem.”
Powell spoke at a time when the Fed is under intense pressure from the Trump administration to cut rates, with an effort by the president to fire Governor Lisa Cook pending before the Supreme Court, and administration officials challenging the wisdom of Fed emergency programs during the pandemic and during the 2007 to 2009 economic crisis.
Powell said those efforts, under extraordinary circumstances, likely helped the economy avoid far worse outcomes.
“These two back-to-back world historical crises have left behind scars that will be with us for a long time. In democracies around the world, public trust in economic and political institutions has been challenged. Those of us who are in public service at this time need to focus tightly on carrying out our critical missions to the best of our ability in the midst of stormy seas and powerful crosswinds,” said Powell, whose term as chair ends in May, with Trump already mulling his successor.
“Despite these two unique, extremely large shocks, the U.S. economy has performed as well or better than other large, advanced economies around the world.”
(Reporting by Howard Schneider; Editing by Andrea Ricci)
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