The US Federal Reserve is changing its stance and signaling an impending rate cut

In 2022, when the Federal Reserve System (FES) switched to fighting inflation, it had to suddenly raise interest rates so that monetary policy could keep up with rapidly rising prices.

Two years later, the emphasis has changed again – this time to protect the labor market, as FES Chairman Jerome Powell emphasized in his speech at the Fed’s annual conference in Jackson Hole on Friday.

Policy alignment seems to be needed again – in the opposite direction, though perhaps at less of a feverish pace.

Powell’s indication of an impending rate cut shows that new risks are emerging in the labor market, and now the FES has made its main task to deal with them.

Open Question: Is the weakening labor market and rising unemployment in the US a sign that the economy is settling into a healthy zone of steady growth with little risk of unemployment rising, or is it part of a slide that picks up speed?

The answer to that question will emerge in the upcoming earnings reports and will determine how quickly the Fed will need to cut rates to prevent what Powell called “another unexpected recession in the labor market situation. “

“We do not seek or welcome further deterioration in labor market conditions,” Powell said, comments that appeared to set the current unemployment rate of 4.3% as the worst. good to protect him.

The unemployment rate was 4.1% and fell when Pavel became chairman in 2018, and in 2019 it fell to 3.5% regardless of inflation – Pavel said he hoped that can restore these conditions.

The Fed’s current rate of 5.25%-5.50% is seen as limiting economic growth and threatening jobs, and well above officials’ average estimate of a long-term “neutral” rate of 2.8%. As inflation continues to decline towards the FES target of 2%, changes in the labor market will determine how quickly officials move towards that neutral rate and whether it is necessary have an even lower rate to restore full employment.