Federal Reserve Chairman Jerome Powell has pledged to take all necessary steps to maintain a robust labor market, signaling the central bank’s commitment to preventing a rise in unemployment that could tip the U.S. economy into a recession.
“We do not seek or welcome further cooling in labor-market conditions,” Powell stated emphatically during a speech on Friday, outlining the rationale for potential interest rate cuts. He emphasized that the Fed is prepared to act against any threats, including the risk of further weakening in the labor market.
After holding interest rates at a 24-year high to combat inflation, the Fed is now poised to cut rates in September. With inflation gradually nearing its 2% target, the Fed’s attention has shifted toward the rising unemployment rate. Powell acknowledged this shift, highlighting that the central bank’s mandate is to balance low inflation with a strong job market.
“The upside risks to inflation have diminished,” Powell said during his speech at the Fed’s annual Jackson Hole symposium. “And the downside risks to employment have increased.”
A key concern is the unexpected rise in the unemployment rate, which has climbed to a nearly three-year high of 4.3% in July from 3.4% just 18 months ago. This rate now exceeds the Fed’s projections for the coming years.
Chicago Fed President Austan Goolsbee echoed these concerns, noting in a CNBC interview that there are “warning lights” flashing in parts of the jobs market. Other indicators, such as job growth and openings, have also weakened considerably.
Last week, government data revealed that the U.S. economy added 818,000 fewer jobs than initially reported between spring 2023 and spring 2024.
“With inflation taking a backseat, 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 emphasized the importance of a strong labor market during his tenure, highlighting 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 noted, pointing to low unemployment, high workforce participation, and healthy wage gains.
Despite recent concerns, Powell stressed that the labor market remains relatively healthy, attributing the rise in unemployment largely to more workers entering the labor force and a slowdown in hiring, rather than increased layoffs.
He also pointed out that the current labor market hasn’t been a significant driver of inflation, unlike in previous periods of high inflation. This unusual dynamic gives the Fed more room to reduce interest rates, which could boost the economy and encourage more hiring.
“We will do everything we can to support a strong labor market,” Powell reaffirmed.
