Federal Reserve Chairman Jerome Powell hinted that interest rate reductions are on the horizon as the central bank eyes softening in the labor market.
Powell, speaking on Friday in Jackson Hole, Wyoming, at a closely watched annual Fed symposium, discussed the changing dynamics of inflation and the jobs market. Most investors anticipate that the Fed will move toward cutting its interest rate target soon, after holding it steady this year, even under pressure from President Donald Trump.
“With policy in restrictive territory, the baseline outlook and the shifting balance of risks may warrant adjusting our policy stance,” Powell said.
Powell told the crowd that the Federal Open Market Committee is faced with a challenging task. Inflation is still too high, above the Fed’s 2% goal, and officials are concerned about inflationary pressures. But at the same time, some indicators suggest that the labor market is starting to take a hit, putting the central bank in a complicated position.
“In the near term, risks to inflation are tilted to the upside, and risks to employment to the downside — a challenging situation,” he said. “When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate.”
The Fed has a dual mandate: Price stability, which it defines as keeping inflation near 2%, and full employment.
Generally, the Fed raises rates when it fears inflation is rising above the target. The most recent inflation data has painted a mixed picture for the Fed. The consumer price index showed inflation holding steady at 2.7, but the producer price index had inflation jumping a percentage point higher to 3%.
As for the jobs picture, Powell said Friday that “downside risks to employment are rising.”
The July jobs report showed that some 258,000 fewer jobs were added in May and June than were previously reported. More notably, the three-month moving average of job gains was just 35,000 in July, below the level needed to keep pace with population growth.
In his speech, Powell said that it was difficult to interpret the effects of Trump’s aggressive tariff agenda and to changes in tax policy that were implemented as part of Republicans’ One Big Beautiful Bill Act, which passed the House and Senate this summer and were signed into law by the president.
He also touched on Trump’s immigration crackdown and its effects on the jobs market.
“This year, the economy has faced new challenges,” the chairman said. “Significantly higher tariffs across our trading partners are remaking the global trading system. Tighter immigration policy has led to an abrupt slowdown in labor force growth.”
“Over the longer run, changes in tax, spending, and regulatory policies may also have important implications for economic growth and productivity,” he added.
Powell said there is “significant uncertainty” about what the lasting effects of these changes will be on the U.S. economy.
Powell said that tariffs have started to put upward pressure on the prices of certain categories of goods, which has been an ongoing concern for Fed officials.
There are mixed views among Fed officials about how tariffs might affect inflation. Some believe that the tariffs are merely one-off increases in the price level and won’t cause long-term inflation, while others fear the possibility of a wage-price spiral that boosts overall inflation.
