Federal Reserve Chair Jerome Powell recently voiced his stance on policy easing, stating that the labor market is no longer overheated and conditions are now less tight than those that prevailed before the pandemic. In addition, he said that the restrictive monetary policy helped ease inflationary pressures closer to the central bank’s 2 percent target. “My confidence has grown that inflation is on a sustainable path back to 2 percent,” he stated.
Powell’s comments came during his participation at the economic symposium on Friday sponsored by the Federal Reserve Bank of Kansas City, Jackson Hole, Wyoming.
Powell added that the economy continues to grow at a solid pace. However, inflation and labor market data show an evolving situation. The upside risks to inflation have diminished. However, the downside risks to employment have increased. Balancing the risks of both, Powell said: “The time has come for policy to adjust. The direction of travel is clear, and the timing and pace of rate cuts will depend on incoming data, the evolving outlook, and the balance of risks.”
Labor market cools
The U.S. labor market has cooled considerably from its formerly overheated state. The unemployment rate started rising over a year ago and is now at 4.3 percent, still low by historical standards. However, unemployment has gained one full percentage point above its level in early 2023.
The Fed chair attributes most of the rise to the last six months where the job market saw a substantial increase in the supply of workers and a slowdown from the previously frantic pace of hiring. Despite the rise in unemployment, the ratio of vacancies to unemployment has returned to its pre-pandemic range. The hiring and quitting rates are now below the levels that the U.S. recorded in 2018 and 2019. In addition, nominal wage gains have moderated.
“It seems unlikely that the labor market will be a source of elevated inflationary pressures anytime soon. We do not seek or welcome further cooling in labor market conditions,” Powell added.
Inflation slows
During the COVID-19 pandemic, distortions to supply and demand, as well as severe shocks to energy and commodity markets, were important drivers of high inflation. Since then, the reversal of these distortions has led the U.S. closer to its 2 percent target despite a slowdown in the labor market.
“Our restrictive monetary policy contributed to a moderation in aggregate demand, which combined with improvements in aggregate supply to reduce inflationary pressures while allowing growth to continue at a healthy pace,” Powell added.
As labor demand also moderated, the historically high level of vacancies relative to unemployment has normalized primarily through a decline in vacancies without sizable and disruptive layoffs. This brings the labor market to a state where it is no longer a source of inflationary pressures.
Read: U.S. business activity hits 4-month low on manufacturing output decline, says S&P
Next meeting’s policy rate changes
The fast rise in prices during the pandemic led the Fed to increase its benchmark policy rate from the near-zero level to the current 5.25-5.50 percent range, the highest level in 25 years. The central bank held those interest rates for more than a year even as the economy defied frequent predictions of recession, inflation fell, and economic growth continued.
In addition to Powell’s recent comments, Fed officials will provide updated economic projections at their meeting next month which will provide additional details on how they expect the benchmark policy rate to evolve from here.
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