Federal Reserve Chair Jerome Powell reaffirmed Tuesday that the central bank will act if labor market conditions continue to soften.
This leaves the door open for further interest rate cuts before the end of the year but without any pre-commitment.
Speaking at the Greater Providence Chamber of Commerce's Economic Outlook Luncheon in Rhode Island, Powell painted a nuanced picture of the U.S. economy: "The downside risks to employment have risen.”
Powell emphasized that the Fed's current policy remains "modestly restrictive" and "well positioned to respond to potential economic developments."
A Turn But Not A Full Fed Pivot
Last week, the Federal Open Market Committee lowered the federal funds target range by 25 basis points to 4.00%–4.25%. Powell called it a "risk management cut" aimed at addressing rising downside risks to employment while maintaining progress on inflation.
In his remarks on Tuesday, Powell reiterated that monetary policy is not on a preset course and that the Fed will remain data-dependent as it heads into the final two meetings of the year.
"Two-sided risks mean there is no risk-free path," Powell said. "If we ease too aggressively, we could leave the inflation job unfinished… if we maintain restrictive policy too long, the labor market could soften unnecessarily."
According to the CME FedWatch Tool, traders are pricing in an 92% probability of another 25-basis-point cut at the Fed's October meeting, and a 77% chance of a further cut in December.
Labor Market in Focus
Powell was blunt in acknowledging that the U.S. labor market has cooled more than the Fed anticipated.
Job creation over the past three months has averaged just 29,000 new positions per month, well below the breakeven pace required to keep unemployment stable. The jobless rate ticked up to 4.3% in August, its highest level in over a year.
Importantly, Powell highlighted that job losses have disproportionately affected minority and younger workers, and that part of the recent decline in labor force participation may reflect cyclical weakness rather than demographics.
"We see that the labor market is softening—and we don't need it to soften anymore. We don't want it to," Powell said.
Fed Must Guard Price Stability Despite Labor Market Risks
Powell addressed the inflationary impact of recent tariff hikes. Incoming data and surveys suggest that tariffs, rather than broad-based inflation pressures, drive the latest price increases. Importers, Powell says, appear to be absorbing some of the cost increases rather than passing them entirely onto consumers, helping to cushion the immediate impact.
Still, Powell cautioned that a one-time pass-through of tariffs on inflation is expected later this year, as higher costs work their way through supply chains.
"A ‘one-time' increase does not mean ‘all at once,'" he said, adding that the price adjustment will likely be spread out over several quarters, showing up as temporarily higher inflation during that period.
While Powell described the inflationary effect as likely short-lived, he stressed the need for vigilance, warning that the Fed "can't leave the inflation goal unguarded." The Fed chair acknowledged the growing difficulty in balancing its dual mandate of stable prices and maximum employment.
"There's no risk-free path," he said. "It's very difficult when the two goals are in conflict. You've got to make a compromise. We haven't been in this situation in many, many years."
On AI And What Comes Next
During the Q&A portion of the event, Powell offered tempered remarks on artificial intelligence, calling it "too early" to declare it the most disruptive economic force of our time.
He acknowledged concerns about job displacement but emphasized that history shows innovation tends to generate new employment opportunities over time.
"Some jobs will be phased out, some will evolve, and new ones will come.” Yet, Powell indicated is still hard to predict how this will play out.
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