– Largely Brushes Off Signs of Softening, Uncertainty For Now
– Economy Doesn’t Need Fed to Do Anything: ‘We Can And We Should Wait’
– Other Fed Officials Sounding More Concerned About Economic Outlook
By Steven K. Beckner
(MaceNews) – Federal Reserve Chairman Jerome Powell continued Friday to say that the Fed need not be “in a hurry” to cut interest rates, given “solid” economic and labor market conditions, even as some of his colleagues hinted at greater concern about the outlook.
Speaking after the Labor Department released a mildly disappointing February employment report, Powell remained positive in remarks to the University of Chicago Booth School of Business’s annual Monetary Policy Forum.
Powell did point to greater uncertainty surrounding trade and other policies of the fledgling Trump administration, but said for now the economy is “in a good place,” with inflation headed toward the Fed’s 2% target and labor markets near full employment.
Despite increased uncertainties, he said “the costs of being cautious are very, very low.”
“We can wait, and we should wait,” added Powell, who was speaking two weeks before the Fed’s rate-setting Federal Open Market Committee meets to take stock of economic and financial conditions and adjust its monetary policy settings.
At its late January meeting, the FOMC left the key federal funds rate unchanged in a target range of 4.25% to 4.5% after cutting it by 100 basis points at the last three meetings of 2024.
Following that meeting, Powell said the FOMC was in “no hurry” to cut rates, given that inflation was still “elevated” and the labor market remained “solid.” He repeated that message in two days of testimony on the Fed’s semi-annual Monetary Policy Report to Congress last month. A host of other Fed officials echoed this cautious approach over the past month.
That patient mood may be starting to shift, however. In their most recent remarks, Fed officials have begun to sound somewhat less single-minded about inflation reduction, even as Wall Street has become more hopeful about multiple 2025 rate cuts.
Slower consumer spending and economic activity, together with concern about tariff impositions on major U.S. trading partners, have increased speculation that the Fed might resume cutting rates. So did a January downtick in the price index for personal consumption expenditures (PCE), the Fed’s preferred inflation gauge, although relief over PCE disinflation has been tempered by increases in some measures of inflation expectations.
The negative inversion of the Atlanta Federal Reserve Bank’s first quarter GDPNow growth forecast raised some eyebrows as well. Nor can policymakers ignore the tightening of financial conditions in the equity market that have accompanied the brewing trade war.
It is also known Fed officials are paying increasing attention to signs of softening in the labor market. Friday morning’s employment report showed non-farm payrolls growing by 151,000 – less than expected, though not dramatically so. January payrolls were revised down significantly to 125,000. The unemployment rate ticked up a tenth to 4.1%, while labor force participation declined from 62.6% to 62.4%. Average hourly earnings gains also slowed from 4.1% to 4.0% year-over-year.
So far, though, the Fed chairman is not noticeably changing his tune. In his Monetary Policy Forum speech, Powell reiterated the same points he made after the FOMC and in congressional testimony.
“Despite elevated levels of uncertainty, the U.S. economy continues to be in a good place,” he said. “The labor market is solid, and inflation has moved closer to our 2% longer-run goal.”
Powell said “the economy has been growing at a solid pace,” noting that “GDP expanded at a 2.3% annual rate in the fourth quarter of last year, extending a period of consistent growth that has been supported by resilient consumer spending.”
He acknowledged that “recent indicators point to a possible moderation in consumer spending” and that “recent surveys of households and businesses point to heightened uncertainty about the economic outlook.”
But Powell was not ready to prejudge. “It remains to be seen how these developments might affect future spending and investment. Sentiment readings have not been a good predictor of consumption growth in recent years.”
He added that the Fed will “continue to carefully monitor a variety of indicators of household and business spending.”
Despite a slower pace of job gains and a rise in unemployment in February, Powell called the labor market “solid and broadly in balance.”
Referring to the Labor Department report, he commented, “Smoothing over the month-to-month volatility, since September, employers have added a solid 191,000 jobs a month on average. The unemployment rate remains low and has held in a narrow range between 3.9 and 4.2 percent for the past year.”
Powell added, “With wage growth moderating and labor supply and demand having moved into better balance, the labor market is not a significant source of inflationary pressure.”
Regarding inflation, Powell observed that “recent readings remain somewhat above our 2% objective,” and “the path to sustainably returning inflation to our target has been bumpy, and we expect that to continue.”
Powell also acknowledged increases in some inflation expectation gauges, but said “most measures of longer-term expectations remain stable and consistent with our 2 percent inflation goal.”
Powell said the economy, and in turn monetary policy, could be affected not just by trade policies, but also fiscal policy, regulatory policies and policies on immigration.
“As we parse the incoming information, we are focused on separating the signal from the noise as the outlook evolves,” he said.
Against that backdrop, Powell declared, “We do not need to be in a hurry, and are well positioned to wait for greater clarity.”
He made much the same point in response to a question about how the FOMC should make monetary policy in face of heightened uncertainty. “Right now … the costs of being cautious are very, very low. The economy is fine. It doesn’t need for us to do anything … . We can wait and we should wait.”
But some of Powell’s fellow policymakers have been sounding more anxious about the outlook this week. Nascent fissures in the economy’s strong facade have begun to affect Fed rhetoric.
Preceding Powell at the same Forum Friday morning, Fed Governor Michelle Bowman (not usually known for dovish sentiments) said, “although the FOMC has been focused on lowering inflation in the past few years, as we continue to make progress on approaching our 2% target, I expect that the labor market and economic activity will become a larger factor in the FOMC’s policy discussions.”
Also Friday morning, Governor Adriana Kugler said she “sees the U.S. labor market as having substantially rebalanced, and conditions have stabilized at a level that I believe is close to the FOMC’s goal of maximum employment. Still, I am closely monitoring any signs of changes in the labor market so that we can keep it in the good place that it is now while bringing down inflation to our target.”
The previous day, Governor Christopher Waller all but ruled out a rate cut at the FOMC’s March 18-19 meeting on Thursday, but strongly suggested economic cooling and further disinflation could well justify at least one cut at subsequent meetings.
After pointing to signs of softness, he said he wants to wait to see if weakness shows up in broader economic statistics. “I want to see what happens with the February inflation data. I want to see a little bit more with what happens with tariff policies” before deciding when to cut rates.
Earlier Thursday, Philadelphia Fed President Patrick Harker also sent up warning flares. “Unemployment still low, (and we’re) still getting growth, but there are threats to this,” he said. “We’re starting to see that confidence is starting to wane.”
On Monday, St. Louis Fed President Alberto Musalem, usually thought of as relatively “hawkish,” said he “would become concerned if we begin to see more evidence of a consumer pullback or a dampening of business confidence and investment plans.” He added that “the recent uptick in initial claims for unemployment insurance bears watching.”
But the voting St. Louis Fed chief didn’t fully retreat from inflation concerns. Ensuring that it “converges to target” with “the labor market remaining near full employment … requires that monetary policy remains modestly restrictive until inflation convergence is assured,” he said, adding that risks to inflation are “skewed to the upside” and describing risks to inflation expectations as “elevated.”
Musalem said a quicker than expected decline in inflation “would provide more confidence for reducing the policy rate toward neutral,” but warned, “a different monetary policy response could be appropriate if above-target inflation is sustained, or longer-term inflation expectations rise. In that case, a more restrictive monetary policy than the baseline path might be appropriate.”
On the other hand, New York Fed President John Williams, the FOMC Vice Chairman, said Tuesday that monetary policy is “in a good place” and said, “I don’t see any need to change it.”