“As inflation has declined and the labor market has cooled, the upside risks to inflation have diminished and the downside risks to employment have increased.” That was Federal Reserve Chairman Jerome Powell at his Sept. 18 press conference on the heels of cutting the Federal Funds Rate to 4.75 percent to 5 percent, acknowledging the basic reality that the U.S. economy, in particular, U.S. labor markets after peak inflation are in a cycle of shedding jobs.
Another way of looking at it, particularly early in the process, is that decisions for further rate cuts are predicated on worsening labor market conditions, emphasizing the Fed’s dual mandate, such that the higher the unemployment rate ticks up, the more rate cuts the Fed will initiate.
Interest rates will come down amid the cooler rate of inflation — although it’s worth noting that prices are still well above their pre-inflation levels — and then, if and when labor market conditions worsen, the Fed will keep cutting rates until as inflation bottoms and then the new, lower rate will be parked until such time as inflation goes above the Fed’s 2 percent mandate levels, and then the interest rate hiking cycle begins anew.
At that point, historically, the Fed begins cutting interest rates, sometimes ahead of a slowdown or recession, sometimes during such a downturn, but it always ends up in the same spot.
Now, as Powell is acknowledging, we’re on the other side of that equation, stating that labor markets are now expected to worsen greater than expected: “In the labor market, conditions have continued to cool.
The unemployment rate has moved up but remains low at 4.2 percent.
The median projection for the unemployment rate in the SEP is 4.4 percent at the end of this year, four-tenths higher than projected in June.” As a result of weakening labor market conditions, or “cooling” as Powell put it, more rate cuts are expected: “In our SEP, FOMC participants wrote down their individual assessments of an appropriate path for the federal funds rate based on what each participant judges to be the most likely scenario going forward.
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