Federal Reserve Chair Jerome Powell is not known for giving decisive hints. Still, on Tuesday he did something rare: he openly acknowledged the rising “downside risks to unemployment” in a clearly dovish signal that the central bank is preparing to ease monetary policy.
“With the clarity of hindsight, we could have—and perhaps should have—stopped asset purchases sooner,” he said.
That acknowledgement shows Powell is keenly aware of the cost of acting too slowly—and may now be erring on the side of avoiding a recession rather than crushing the last 0.9 percentage points of inflation to get the inflation rate down to the Fed’s target of 2%.
Powell noted that the Fed’s preferred inflation measure—core PCE—is running at 2.9%, but said much of the recent bump in goods prices reflected tariffs as opposed to intrinsic inflationary pressure. That line was not accidental. It distances price pressures from monetary policy and gives the Fed cover to cut rates without appearing to surrender on inflation.
For a Fed Chair who prefers restraint, this was messaging with intent. The fight against inflation isn’t over, but the Fed just acknowledged a new reality: jobs now matter as much as prices, and policy has to catch up.
Jobs present more of a risk now
But Powell acknowledged Tuesday that the central bank’s dual mandate—stable prices and maximum employment—has suddenly started pulling in the other direction.
“In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen,” Powell said.
Payroll growth has slowed sharply, participation has dipped, and both business and household surveys show declining confidence in job availability, he added. Those are prime economic conditions to set up policy easing.
Balance sheet runoff ending
“We will set policy based on the evolution of the economic outlook and the balance of risks, rather than following a predetermined path,” Powell told investors.
