The labor market is slowing down, but it does not cause concerns. Inflation forecasts are rising, but overall progress remains stable. In the last policy decision before the second Trump administration, Federal Reserve Chairman Jerome Powell sought to make sense of conflicting stories and conflicting data. And amid all this uncertainty, the central bank chief offered one last key word: caution.
“When the path is uncertain, move a little slower“Powell said Wednesday during the news conference. “It’s not much different than driving on a foggy night or walking into a dark room full of furniture. You just slow down.” (Someone needs to give this silver-haired man a glowing reindeer!)
According to Powell, the story of falling inflation is still valid. Even as the Federal Reserve announced a third consecutive cut, equivalent to a full percentage point, monetary policy remains restrictive. That’s because officials still believe inflation will be an ongoing challenge during the next administration. Compared to previous estimates, central bankers expect inflation to end this year higher than expected and remain at a higher rate next year.
Blame COVID. Or to the economic fluctuations that followed the public health crisis.
Powell’s rationale for discouraging the market
“The story remains that we are undoing these big shocks that the economy suffered in 2021 and 2022” Powell said. If price pressures remain stubborn, the risks of a deteriorating labor market — the other side of the Fed’s mandate — appear to have dissipated. The same goes for the risks of the labor market contributing to higher prices.
Powell said the labor market is where it needs to be, more relaxed than it was before the pandemic and continuing to slow, but not enough to raise alarm bells. In fact, the Federal Reserve reduced its unemployment forecasts from 4.4% to 4.2% for the end of this year and from 4.4% to 4.3% for next year.
The market’s initial reaction was to pull back, leading to the worst hour for stocks since the COVID crisis, Bloomberg noted.
Fewer anticipated cuts is another year of “high for longer,” which seemed to outweigh Powell’s qualified optimism. But as Neil Dutta, head of economic research at Renaissance Macro, noted, the Fed may have lowered the bar for future cuts by revising its inflation forecasts upward and its unemployment estimates downward.
Trump’s return is the great unknown of politics. The potential for new tariffs, retaliatory tariffs and their effects on consumer prices will inject layers of uncertainty. But Powell said the Fed can take its time. After all, none of Trump’s proposed plans have been implemented, and at least some of them likely never will be.
“The outlook is pretty bright for our economy,” Powell said, concluding the pivotal year when the cycle of cuts began. “But we have to stay on task.”
Source: Ambito
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