Unemployment, Not Inflation, Is the Fed’s New Focus—Powell

Federal Reserve Chairman Jerome Powell has pledged to take all necessary measures to sustain a strong labor market, vowing to prevent a rise in unemployment that could push the U.S. economy into recession.

“We do not seek or welcome further cooling in labor-market conditions,” Powell declared in a speech on Friday, justifying the potential for a reduction in interest rates. He stressed that the Fed is well-equipped to address any risks, including the threat of further deterioration in the job market.

After maintaining interest rates at a 24-year high to curb inflation, the Fed is now considering rate cuts in September. With inflation gradually approaching its 2% target, the central bank’s focus has shifted to rising unemployment. Powell emphasized that the Fed’s dual mandate requires balancing low inflation with a robust labor market.

“The upside risks to inflation have diminished,” Powell stated during the Fed’s annual Jackson Hole conference. “And the downside risks to employment have increased.”

A primary concern is the recent surge in unemployment, which reached a nearly three-year high of 4.3% in July, up from 3.4% just 18 months ago. This figure now surpasses the Fed’s projections for the coming years.

Chicago Fed President Austan Goolsbee expressed similar worries, noting in a CNBC interview that there are “warning signs” emerging in parts of the labor market. Other indicators, including job growth and openings, have also shown significant weakness.

Recently revised government data revealed that the U.S. economy added 818,000 fewer jobs than initially reported between spring 2023 and spring 2024.

“With inflation no longer the primary concern, the focus has shifted to the labor market,” said Ryan Sweet, chief U.S. economist at Oxford Economics. “The Fed won’t tolerate further increases in unemployment.”

Powell has consistently highlighted the importance of a strong labor market during his time as chairman, underscoring the societal benefits of low unemployment, particularly for minorities and low-income communities.

“In the years just prior to the pandemic, we saw the significant benefits to society that can come from a long period of strong labor market conditions,” Powell remarked, referencing low unemployment, high workforce participation, and healthy wage gains.

Despite recent concerns, Powell reassured that the labor market remains relatively healthy, attributing the rise in unemployment primarily to an influx of workers into the labor force and a slowdown in hiring, rather than increased layoffs.

He also noted that the current labor market hasn’t significantly contributed to inflation, a departure from past periods of high inflation. This unusual situation gives the Fed more flexibility to lower interest rates, which could boost economic growth and spur more hiring.

“We will do everything we can to support a strong labor market,” Powell reaffirmed.