Federal Reserve Chair Jerome Powell indicated that central bank officials are on track to reduce interest rates in September unless there is a halt in inflation progress, highlighting concerns about further weakening of the labor market.
Policymakers Nearing Rate Cut Decision
Powell noted that policymakers are close to deciding to lower borrowing costs from their highest level in over two decades. This reflects growing confidence within the Fed to ease its economic restraints. However, he emphasized that officials may not cut rates if upcoming price data disappoints.
William Dudley, former New York Fed President, said on Bloomberg Television that September is likely to happen. The statement and press conference confirm this unless the economic outlook changes significantly.
Powell’s cautious optimism suggests a possible rate cut in September, but data could alter decisions, according to WSJ Subscription Offers.
Current Federal Funds Rate Maintained
The Federal Open Market Committee maintained the federal funds rate in a range of 5.25% to 5.5% on Wednesday, a level that has been in place since last July.
The question is whether the data, evolving outlook, and risk balance align with rising inflation confidence and a strong labor market,” Powell said Wednesday. “If so, we might consider reducing our policy rate at the September meeting.
Shift in Focus to Labor Market Concerns
Adjustments to the post-meeting statement, along with Powell’s remarks, highlighted policymakers’ growing concern about weakening the labor market. This represents a shift from their previous intense focus on inflation for over two years.
“The economic outlook is uncertain, and the committee is attentive to the risks to both sides of its dual mandate,” policymakers wrote, rather than prior wording that concentrated solely on inflation risks.

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Labor Market Conditions
Powell described the labor market as solid but decelerating. Hiring has slowed, and the unemployment rate has risen to 4.1% — the highest since 2021 but still historically low. Layoffs remain modest.
He stated that the labor market does not need to weaken further for the Fed to achieve its 2% inflation target.
“We’ve had this really significant decline in inflation and unemployment has remained low,” Powell said at the press conference, adding that it was an unusual and welcome outcome. “What we’re thinking about all the time is ‘how do we keep this going?’”
Balancing Risks
The Fed aims to reduce inflation without causing a recession. Powell has stressed the delicate balance between cutting rates too early and reigniting inflation. He also warned against cutting rates too late. Starting to lower rates in September could prevent significant labor market deterioration, even if inflation hasn’t fully returned to 2%.
Powell said we haven’t tackled inflation yet, but we can afford to start dialing back the restrictions in our policy rate.
Political and Economic Tension
Elevating labor market risks to an equal footing with inflation reflects both political and economic tension.
A spike in unemployment while approaching 2% inflation would attract criticism, especially given the Fed’s slow response to rising prices. This situation could potentially damage the Fed’s credibility with the public.
Markets responded calmly to the news, with Treasuries rallying after Powell’s press conference. Interest-rate swaps indicated traders have fully priced in a quarter-point cut in September — and nearly 70 basis points worth of reductions for the year.
“It would take a major reversal in the inflation data to take September off the table,” said KPMG Chief Economist Diane Swonk.
Future Uncertainty
A September rate cut is not guaranteed. Inflation, measured by the Fed’s preferred gauge, rose 2.5% in the past year. Though figures have been trending lower, policymakers are wary of a potential stall like earlier this year.
Powell said he “can imagine a scenario in which there would be everywhere from zero cuts to several cuts” over the remainder of the year, “depending on the way the economy evolves.”
Nela Richardson, chief economist at ADP, said the Fed seeks maximum flexibility. Being cornered is the worst position for them. The low unemployment rate benefits the Fed, allowing them to remain patient.
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