Fed Chair Powell Warns of ‘Challenging Situation’ as Labor Market Cools and Inflation Persists

Federal Reserve Chair Jerome Powell has said that the economy faces a "challenging situation" as the labor market weakens while inflation persists at an elevated level.

In comments to the Greater Providence Chamber of Commerce in Warwick, RI, on Tuesday, Powell said that the Fed's rate cut last week came in response to rising concerns about the labor market, following a series of weaker-than-expected employment reports.

However, he highlighted that the Fed faces a difficult task ahead in managing the two sides of its dual mandate to maintain stable prices and maximum employment.

“Near-term risks to inflation are tilted to the upside and risks to employment to the downside—a challenging situation,” he said. “Two-sided risks mean that there is no risk-free path.”

Although he did not use the word, the situation Powell describes is consistent with stagflation, an economic quicksand in which growth slows while inflation soars.

Still, Powell sounded a note of optimism, saying that the "U.S. economy is showing resilience in the midst of substantial changes in trade and immigration policies" while noting that the full impact of these changes will take time to emerge.

Powell expressed confidence in the Fed's current rate policy, but said that the Federal Open Market Committee (FOMC) would consider further rate cuts if needed, while emphasizing that "policy is not on a preset course."

“The increased downside risks to employment have shifted the balance of risks to achieving our goals,” he said. “This policy stance, which I see as still modestly restrictive, leaves us well positioned to respond to potential economic developments.”

Realtor.com® Senior Economist Jake Krimmel notes that Powell in his comments seemed to emphasize the risk of cutting rates too quickly lest inflation once again spin out of control.

"A series of slow and controlled cuts allows the Fed to monitor conditions in real time as it continues weighing up both sides of its dual mandate," says Krimmel. "Moving more deliberately also, in Powell’s view, will necessarily keep inflation from bubbling up, thereby reducing one of two key risks on the way toward neutral."

Last week, Powell delivered somewhat hawkish remarks in a press conference following the Fed's rate cut, prompting a sell-off in bonds that put upward pressure on mortgage rates.

Investors seemed particularly spooked by Powell's characterization of the rate decision as a "risk-management cut" in response to a weakening labor market, while he highlighted that elevated inflation remains a concern.

However, bond markets showed little movement as Powell spoke Tuesday, suggesting that investors have largely digested his stance on the economy.

The next major news for mortgage rates will come with next week's monthly jobs report. A weak report could send rates lower, while hiring that is stronger than expected could push them higher.

The average 30-year fixed mortgage rate stood at 6.26% last week, an 11-month low, according to Freddie Mac.

Bowman urges swift rate cuts

Earlier Tuesday, Fed Gov. Michelle Bowman delivered a speech saying the Fed is behind the curve in making rate cuts, urging further easing to prevent mounting job losses.

Bowman, appointed by Trump in 2018, was a dissenting voter in July, calling then for a quarter-point rate cut while the majority of the FOMC voted to hold rates steady.

In her comments Tuesday, she pointed to weakness in the housing market as one signal that the Fed should move quickly out of restrictive territory.

"Declines in housing activity, including single-family home construction and sales, have been accompanied by higher inventories of homes for sale and falling house prices, suggesting that housing demand has also weakened," she said.

Bowman added that elevated mortgage rates may be exerting a more persistent drag, as income growth expectations have declined, while house prices remain high relative to rents.

"Given very low housing affordability, existing home sales have remained depressed since 2023 and at levels only comparable with the early 2010s following the financial crisis," she said. "I am concerned that, in the current environment, declines in house prices could accelerate, posing downside risks to housing valuations, construction, and inflation."

Bowman in her comments argued that the threat of inflation has largely receded, saying the Fed should instead focus on warning signs in the labor market

"It's a lot easier to support the labor market by lowering the federal funds rate than it is to fix it after it's broken," she said.

Bowman's remarks echoed those of Stephen Miran, a recent Trump appointee to the Fed's Board of Governors. On Monday, Miran called for swift and dramatic rate cuts.

In comments to the Economic Club of New York on Monday, Miran argued that the policy rate should be in the mid-2% range, nearly two percentage points lower than the current range of 4% to 4.25%.

Miran in his comments argued that key factors, including Trump's immigration and trade policies, have changed the calculus for the Fed's "neutral rate," which is the rate that neither encourages spending and investment, nor restricts the economy to tame inflation.

"The upshot is that monetary policy is well into restrictive territory," said Miran. "Leaving short-term interest rates roughly 2 percentage points too tight risks unnecessary layoffs and higher unemployment."

However, in his remarks this week, Powell argued that cutting rates too quickly could invite higher inflation.

"If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2% inflation," said Powell. "If we maintain restrictive policy too long, the labor market could soften unnecessarily. When our goals are in tension like this, our framework calls for us to balance both sides of our dual mandate."

Developing story, more to follow.