Federal Reserve Chair Jerome Powell stated that the central bank is facing a challenging situation due to the risk of faster-than-expected inflation and weak job growth. In a speech to the Greater Providence Chamber of Commerce, Powell noted that there are dangers to both cutting interest rates too quickly, which could lead to a new surge of inflation, and reducing rates too slowly, which could cause unemployment to rise unnecessarily. The current interest rate, ranging from 4% to 4.25%, is considered high enough to mitigate price pressures in the economy, but Powell emphasized that the Fed’s policy is not on a preset course and is prepared to respond to potential economic developments.
Powell’s comments come amid strong opinions from regional Reserve Bank presidents and Fed governors, with some calling for caution in further cuts due to concerns about inflation, while others warn that policy is too tight and more cuts are needed to protect the job market. The Fed policymakers anticipate quarter-point reductions at the October and December meetings, and investors expect these cuts to be implemented. However, Powell cautioned that easing too aggressively could lead to unfinished work on inflation, while maintaining restrictive policy too long could cause unnecessary softening of the labor market.
The job market is a concern, with recent job growth averaging around 25,000 for the past three months, which is below the rate needed to hold the unemployment rate constant. However, other job indicators are broadly stable. Inflation remains somewhat elevated, driven by tariffs, but Powell expects this impact to fade over time. The Fed’s goal is to ensure that this one-time increase in prices does not become an ongoing inflation problem.
Powell’s speech also addressed the intense pressure from the Trump administration to cut rates, with the president attempting to fire Governor Lisa Cook and challenging the wisdom of Fed emergency programs during the pandemic and the 2007-2009 economic crisis. Powell defended the Fed’s actions, stating that they likely helped the economy avoid worse outcomes. He also emphasized the importance of public trust in economic and political institutions, which has been challenged by the recent crises. Despite these challenges, Powell noted that the US economy has performed well compared to other large, advanced economies around the world.