In 2022, the Federal Reserve (Fed) shifts its focus to fighting inflation by raising interest rates to catch up with rapid price increases. By 2024, the focus has shifted again, this time to protecting the job market, as Fed Chairman Jerome Powell highlighted during his speech at the Jackson Hole conference.
Powell signaled a potential rate cut, completing a shift that began in January when the Fed acknowledged growing risks to the job market. The main question now is whether the weakening job market and rising unemployment are signs of an economy in steady growth or the beginning of a deeper recession.
The Fed's current interest rate of 5.25%-5.50% is seen as stifling economic growth and putting jobs at risk, in contrast to the long-term "neutral" rate of 2.8%. Assuming inflation continues to decline toward the Fed's 2% target, the upcoming jobs report will be important in determining how quickly the Fed cuts rates to avoid further weakness in labor market conditions.
Powell emphasized that the Fed does not seek or welcome further cooling in the labor market, with the goal of maintaining the current unemployment rate of 4.3%, which is higher than pre-pandemic levels.
Some economists, such as Nela Richardson of the ADP Research Institute, believe that the economy is heading for normal growth from the pandemic, despite an urgent increase in employment. However, the change in the Fed's language on risk reflects growing concerns about the labor market. In September, Fed officials will update their interest rate projections, with the rate of reduction to be determined based on new data.
Despite the concerns, employment growth in July, while weaker than the pandemic-era average, was seen by some as consistent with a healthy economy returning to pre-pandemic norms.
Powell remains optimistic that the economy can achieve 2% inflation while maintaining a strong labor market. However, there are still concerns that the labor market may be weaker than it appears, with potential risks pushing the Fed toward faster or deeper rate cuts to defend their "maximum jobs" objective.
The Fed governor, Adriana Kugler, even suggested that if a broader measure of unemployment is taken into account, the job market may appear weaker than official statistics indicate, signaling that the challenges ahead may be greater than they appear.
