Fed can’t ignore the risk of higher inflation, Powell says

By Bryan Mena, CNN

Washington (CNN) — America’s central bankers continue to deal with the double whammy of potentially higher inflation and a slowing labor market, Federal Reserve Chair Jerome Powell said Tuesday, calling it a “challenging situation” for Fed policymakers.

But, for now, interest rates are in a good place to deal with either threat, Powell said, suggesting he sees no urgency to lower rates aggressively.

“The increased downside risks to employment have shifted the balance of risks to achieving our goals,” Powell said at an economics event in Warwick, Rhode Island. “This policy stance, which I see as still modestly restrictive, leaves us well positioned to respond to potential economic developments.”

The Fed chief characterized the idea that tariff inflation may be a one-off as a “reasonable base case,” but added that the “uncertainty around the path of inflation remains high” and that officials must “make sure that this one-time increase in prices does not become an ongoing inflation problem.”

“We can’t leave that part of the goal unguarded, and so that’s why we’ve been careful about cutting,” Powell said during a moderated discussion after his remarks.

Powell’s latest comments come as the debate on further rate cuts heats up — a week after policymakers lowered interest rates for the first time since December.

Two Fed officials have already suggested in recent public comments that central bankers may need to cut rates aggressively to protect America’s labor market, while other officials have said the Fed should be cautious on any further cuts.

Investors expect the Fed to reduce rates two more times by the end of the year, according to futures, lowering the central bank’s benchmark lending rate by an additional half point. That would bring the Fed’s key interest rate to its lowest level since October 2022.

Powell reiterated Tuesday much of what he told reporters during a news conference after the Fed’s latest decision on September 17, but indicated that there is no crisis requiring further rate cuts, especially large ones.

Still, Fed policymakers remain in a bind. President Donald Trump’s widespread tariffs are pushing up some prices while job growth hits a lull — putting both sides of the Fed’s dual mandate of stable prices and maximum employment under stress.

“Two-sided risks mean that there is no risk-free path,” Powell said.

The calls for aggressive cuts

Since the Fed’s decision last week, two members of the Fed’s powerful Board of Governors, both Trump appointees, have publicly expressed concern about the US labor market while playing down the potential impact of Trump’s tariffs on prices.

Fed Vice Chair for Supervision Michelle Bowman on Tuesday said “recent
data have revealed a materially more fragile labor market” and that “tariffs will have only a small and short-lived effect on inflation going forward.”

“In my view, the recent data, including the estimated payroll employment benchmark revisions, show that we are at serious risk of already being behind the curve in addressing deteriorating labor market conditions,” she said at an event in Asheville, North Carolina. “Should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward.”

According to Labor Department data, job growth in recent months has been tepid as the number of unemployed people seeking work now exceeds demand for workers, though the unemployment rate remains relatively low, at 4.3%.

On Monday, Fed Governor Stephen Miran, one of Trump’s top economic advisers on an unpaid leave to serve at the Fed, said in his first speech as a monetary policymaker that the consensus view among economists underestimates how much pressure interest rates are putting on the labor market.

“I view policy as very restrictive, (and) believe it poses material risks to the Fed’s employment mandate,” Miran said. He argued that the so-called neutral rate of interest, which is a theoretical level of borrowing costs that neither stimulates nor dampens economic activity, is actually lower than most economists understand.

In Miran’s view, that means the Fed’s key interest rate should be “almost 2 percentage points lower.” That would mean eight quarter-point rate cuts, or four half-point cuts. The Fed typically only delivers large rate cuts in times of economic trouble.

Some Fed officials are on the fence

Some Fed officials aren’t convinced that aggressive rate cuts in the coming months are necessary.

In an interview with CNBC on Tuesday, Chicago Fed President Austan Goolsbee, who votes on policy moves this year, said that inflation remains a problem for the Fed because it hasn’t fully returned to its 2% target yet.

“Eventually, at a gradual pace, rates can come down a fair amount if we can get this stagflationary dust out of the air,” Goolsbee said. “But with inflation having been over the target for four and a half years in a row, and rising, I think we need to be a little careful with getting overly up-front aggressive.”

The Fed’s preferred inflation gauge — the Personal Consumption Expenditures price index — rose 0.2% in July from the prior month, which kept the annual rate unchanged at 2.6%. The Commerce Department on Friday releases August PCE data.

In an interview with The Wall Street Journal that published Monday, Atlanta Fed President Raphael Bostic, who isn’t a voter on the central bank’s policy committee this year, said that “the risk to the price-stability mandate is still the most significant.”

“We get signs from our contacts and from our surveys that prices are likely to still go up some more from here. So we’re going to see some upward movement in inflation,” Bostic said.

“I worry about that,” he added.

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