When the Fed began cutting interest rates in September, inflation was cooling and the job market was showing worrying signs of weakness.
After three months and a 1 percentage point rate cut, the opposite is true. Although the job market appears to be stabilizing, inflation developments are stagnant.
As a result, the central bank is widely expected to pause its rate-cutting campaign at its meeting this month, and Fed officials reinforced that message in a series of speeches this week.
“While this is not my baseline outlook, we cannot exclude the risk that inflation progress could continue to be sluggish,” Fed Director Michelle Bowman said in a speech Thursday.
Mr. Bowman was the only Fed official to vote against the central bank's half-point rate cut in September, but he voted in favor of a more traditional quarter-point rate cut last month. However, in his speech, he said he “could have supported” keeping rates on hold in December, adding that unless the economic situation changed significantly by the end of the month, he was unlikely to support a rate cut in January. suggested that it was low.
“Given these considerations, we continue to favor a cautious and gradual approach to policy adjustments,” Bowman said.
The job market remains strong, so the Fed can afford to be cautious. After a summer of uncertainty, the unemployment rate stabilized, employment growth recovered and layoffs remained low. That gives policymakers confidence that they can keep interest rates around 4.4% without any immediate risk of causing a sharp economic slowdown.
“The strength of our economy allows us to be patient,” Kansas City Fed President Jeff Schmidt said in a speech Thursday. Mr. Schmidt will be a voting member of the Federal Reserve's policy-setting Open Market Committee in January.
The bigger question is what happens if inflation persists and the economy, particularly the labor market, weakens.
“The labor market is in rough balance right now,” San Francisco Fed President Mary Daly said during a panel discussion Saturday. “At this point, we don't want to see a further slowdown in the labor market.”
In recent months, there have been some signs that the labor market is softening, even though the unemployment rate remains low. Employment continues to be depressed and unemployed people are taking longer to find work. Nancy Vanden Houten, senior economist at Oxford Economics, said if these trends become more pronounced, policymakers may decide they need to cut rates further.
“I think things could start to change if we see a further slowdown in hiring or a little bit more layoffs,” he said.
Fed officials will closely monitor Friday's jobs report for signs of further weakness. But they suggest it would take multiple weak reports to be convinced that the labor market is deteriorating.
Bowman said Thursday that rapidly changing immigration trends and other factors make the monthly jobs report difficult to interpret and should make policymakers more cautious.
And Boston Fed President Susan Collins, who like Schmidt has a vote on policy decisions this year, warned in a speech Thursday against “overreacting to individual data readings.” “I have the following concerns,'' he said. The vulnerability of emerging labor markets has decreased. ”
