– Says FOMC Can Proceed ‘Carefully’ But Cites Greater Job Risks
– Announces Significant Shifts in FOMC’s Monetary Policy Framework
By Steven K. Beckner
(MaceNews) – Federal Reserve Chair Jerome Powell hinted Friday that the Federal Open Market Committee could resume lowering short-term interest rates when the Fed’s rate-setting body meets in mid-September.
Powell made no commitment to a near-term rate cut as he keynoted the Kansas City Federal Reserve Bank’s annual Jackson Hole symposium, but he sent an unmistakable signal that this is a strong possibility by saying “the shifting balance of risks may warrant adjusting our policy stance.”
At the same time, though, Powell continued to say the FOMC can and should proceed “cautiously” because of the high degree of uncertainty about the economic outlook and lingering concerns about inflation in the context of dramatic changes in trade and other policies.
Powell also took the opportunity to unveil significant changes to the Fed’s Statement on Longer-Run Goals and Monetary Policy Strategy – changing language that had, in the view of some, encouraged the FOMC to pursue overly expansionary policies.
When the FOMC meets Sept. 16-17, it will be deciding whether to leave the federal funds rate in the current target range of 4.25% to 4.5%, where it has been since lowering its policy rate by 100 basis points over the last three meetings of 2024. On July 30, the FOMC held the key policy rate at that level for a fifth straight meeting, but two governors dissented in favor of immediate rate cuts for the first time since 1993.
Following the July rate announcement, Powell allowed for shifting to a less restrictive policy if labor markets were to move further from the Fed’s “maximum employment” goal. “If you came to the view that the risks of the two were more in balance, that would imply that policy shouldn’t be restrictive. It should be a more neutral stance. And that would be somewhat lower than we are now.”
Two days later, the Labor Department reported a sharp slowing of payroll gains to just 73,000 in July, coupled with a staggering 258,000 downward revision to May and June payrolls. The unemployment rate rose just a tenth to a still low 4.2%, but stays on the unemployment rolls lengthened.
Those jobs data seem to have influenced Powell’s thinking, making him more willing to ease credit, judging from his Jackson Hole address. He was somewhat equivocal, as he talked about the balance of risks facing the Fed but clearly opened the door wider to near-term rate cuts.
As he has before, Powell focused on the adversarial Trump administration’s higher tariffs, as well as changes to immigration, fiscal and regulatory policies, saying, “there is significant uncertainty about where all of these polices will eventually settle and what their lasting effects on the economy will be.”
Because these policy changes affect both demand and supply. Powell said monetary policy-making has been complicated because “distinguishing cyclical developments from trend, or structural, developments is difficult.”
The theme of this year’s Jackson Hole symposium is “Labor Markets in Transition: Demographics, Productivity, and Macroeconomic Policy.” So, fittingly, the Fed chief turned first to the labor market.
Powell acknowledged the surprising weakness of last month’s employment report, noting that with its lower-than-expected July payroll gain and whopping downward revisions to May and June payrolls, payroll job growth had slowed to an average pace of only 35,000 per month over the past three months, down from 168,000 per month during 2024.
Nevertheless, he said, “it does not appear that the slowdown in job growth has opened up a large margin of slack in the labor market—an outcome we want to avoid.”
Powell observed that the unemployment rate remains historically low” at 4.2% and said that slower growth of labor supply has had the effect of “sharply lowering the ‘break-even’ rate of job creation needed to hold the unemployment rate constant.”
Even so, he went on, “this unusual situation suggests that downside risks to employment are rising. And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.” He also took note of slowing GDP growth.
As for inflation, Powell said “the effects of tariffs on consumer prices are now clearly visible,” but he outlined different possible scenarios, some of them more benign than others.
“A reasonable base case is that the effects will be relatively short lived—a one-time shift in the price level…,” he said. “It is also possible, however, that the upward pressure on prices from tariffs could spur a more lasting inflation dynamic, and that is a risk to be assessed and managed…..”
“Another possibility is that inflation expectations could move up, dragging actual inflation with them,” he said, adding that “we cannot take the stability of inflation expectations for granted.”
Powell said the combination of softening labor markets and continuing price pressures present the Fed with a tricky dilemma: “In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside—a challenging situation.”
As he has said before, he said the FOMC will need to “balance both sides of our dual mandate,” and initially he seemed to reaffirm past comments that there is “no hurry” to adjust rates.
“Our policy rate is now 100 basis points closer to neutral than it was a year ago, and the stability of the unemployment rate and other labor market measures allows us to proceed carefully as we consider changes to our policy stance,” said Powell.
But then he changed gears, adding, “Nonetheless, with policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance.”
As always, he added, “monetary policy is not on a preset course.”
Minutes of the late July meeting, released Wednesday, confirmed what Mace News had previously reported about more recent Fed thinking – that officials remain “divided and unsure” about rate cuts, with some strongly leaning in favor, others emphatically opposed and others “on the fence.”
The minutes revealed that “almost all participants viewed it as appropriate to maintain the target range for the federal funds rate at 4-1/4 to 4-1/2 percent” and that “almost all participants agreed that, with the labor market still solid and current monetary policy moderately or modestly restrictive, the Committee was well positioned to respond in a timely way to potential economic developments.”
Two Fed governors, Michelle Bowman and Christopher Waller, voted against the decision to hold the funds rate steady, but they apparently were virtually alone in holding that view.
The day before the Jackson Hole symposium began, host Kansas City Fed President Jeffrey Schmid reasserted his belief that there is no need for the FOMC to cut rates. “I think we’re in a really good spot and I think we really have to have very definitive data to be moving that policy right now…,” the FOMC voter said. “I think we got to be careful about what lowering short-term rates would do to the inflation mentality.”
After talking about the economy and monetary policy, Powell turned to the FOMC’s new Monetary Policy Framework.
Throughout this year, the Fed has been conducting a 2025 Review of Monetary Policy Strategy, Tools, and Communications, a quinquennial exercise aimed at revising the FOMC’s Statement on Longer-Run Goals and Monetary Policy Strategy.
When that Statement was last rewritten in 2020 and revealed by Powell at Jackson Hole on Aug. 27 of that year, fundamental changes were made to the policy framework.
In the midst of the Covid scare, during which government-enforced shutdowns of the economy triggered a deep recession that deepened Fed fears that deflation could push the funds rate to the zero lower bound, the FOMC not only gave itself permission to overshoot the 2% inflation target it unveiled in January 2012, it unhitched itself from the much longer-running Phillips Curve premise that falling unemployment leads inexorably to rising wage-price pressures.
Looking beyond the immediate crisis, it imparted a lasting dovish bias to monetary policy that became more and more consequential as the economy recovered from the recession. It inclined the FOMC to be more aggressive in trying to support the economy than it might otherwise have been.
Getting the most attention in 2020 was the FOMCs shift from a symmetric 2% inflation target to average inflation targeting, but its restatement of its maximum employment goal was just as important. Regarding its maximum employment objective, the FOMC said it would be informed by assessments of the shortfalls of employment from its maximum level. Previously it had referred to deviations from its maximum level.
That made a big difference, as Powell explained in Jackson Hole in 2020: The change to shortfalls clarifies that, going forward, employment can run at or above real-time estimates of its maximum level without causing concern, unless accompanied by signs of unwanted increases in inflation or the emergence of other risks that could impede the attainment of our goals.. Of
course, when employment is below its maximum level, as is clearly the case now, we will actively seek to minimize that shortfall by using our tools to support economic growth and job creation.
In other words, the Fed would no longer allow itself to be stampeded into raising rates when unemployment fell to hypothetically below natural levels on the presumption that low unemployment will inevitably push up inflation, as it had done so often in the past. This implied a demotion of the concept of overheating. Instead, the Fed was seemingly advertising its willingness to let the economy run hot, and some officials expressly said so.
As then Fed Governor Richard Clarida explained a few days after the revised strategy
statement was adopted in 2020, This change conveys our judgment that a low unemployment rate by itself, in the absence of evidence that price inflation is running or is likely to run persistently above mandate-consistent levels or pressing financial stability concerns, will not, under our new framework, be a sufficient trigger for policy action.
Regarding its price stability goal, the FOMC declared five years ago that it “judges that longer-term inflation expectations that are well anchored at 2 percent foster price stability and moderate long-term interest rates and enhance the Committees ability to promote maximum employment in the face of significant economic disturbances. In order to anchor longer-term
inflation expectations at this level, the Committee seeks to achieve inflation that averages 2 percent over time, and therefore judges that, following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve
inflation moderately above 2 percent for some time.
What’s more, by saying it would be “flexible” and “not formulaic” in pursuing its new strategy, the FOMC made clear it wouldl use more discretion than ever in setting rates and other policies.
That revised framework increasingly came into question when supposedly “transitory” inflation erupted in 2021, and persisted until the FOMC belatedly began tightening monetary policy in March 2022. Ultimately, the FOMC raised it to as high as 5.25-5.50% in July 2023, where it was left until September of last year, when the FOMC began a series of three rate cuts totaling 100 basis points.
In its latest iteration, the Statement on Longer-Run Goals and Monetary Policy Strategy has moved at least part of the way back to pre-Covid form, as Powell acknowledged.
He began by saying that he and his fellow policymakers have become less concerned about the risk of the funds rate drawing close to the zero lower bound or “the effective lower bound” (ELB), as the Fed now prefers to call it.
“With inflation above target, our policy rate is restrictive—modestly so, in my view,” he said. ”We cannot say for certain where rates will settle out over the longer run, but their neutral level may now be higher than during the 2010s, reflecting changes in productivity, demographics, fiscal policy, and other factors that affect the balance between saving and investment.’
“During the review, we discussed how the 2020 statement’s focus on the ELB may have complicated communications about our response to high inflation,” Powell continued. “We concluded that the emphasis on an overly specific set of economic conditions may have led to some confusion, and, as a result, we made several important changes to the consensus statement to reflect that insight.”
Therefore, the FOMC made four changes to the statement:
* First, it removed language indicating that the ELB was a defining feature of the economic landscape. Instead, the statement now says the Fed’s “monetary policy strategy is designed to promote maximum employment and stable prices across a broad range of economic conditions.”
* Second, the FOMC returned to a framework of flexible inflation targeting and eliminated the “makeup” strategy. “As it turned out, the idea of an intentional, moderate inflation overshoot had proved irrelevant,” Powell explained, adding that “our revised statement emphasizes our commitment to act forcefully to ensure that longer-term inflation expectations remain well anchored, to the benefit of both sides of our dual mandate.”
* Third, the FOMC removed references to employment “shortfalls,” because as Powell explained, “our use of the term ‘shortfalls’ was not always interpreted as intended, raising communications challenges. In particular, the use of “shortfalls” was not intended as a commitment to permanently forswear preemption or to ignore labor market tightness.”
Instead of “shortfalls,” the revised statement states, “the Committee recognizes that employment may at times run above real-time assessments of maximum employment without necessarily creating risks to price stability.”
The revised statement also notes that maximum employment is “the highest level of employment that can be achieved on a sustained basis in a context of price stability.”
* Fourth, Powell said, “we made changes to clarify our approach in periods when our employment and inflation objectives are not complementary. In those circumstances, we will follow a balanced approach in promoting them.”
“The revised statement now more closely aligns with the original 2012 language,” Powell elaborated. ‘We take into account the extent of departures from our goals and the potentially different time horizons over which each is projected to return to a level consistent with our dual mandate…..”