Powell says the slower labor market is driving interest rate cuts and is looking ahead to a “challenging situation”

Federal Reserve Chairman Jerome Powell said Tuesday that weakness in the labour market outweighed concerns about stubborn inflation, leading to a decision last week supported by lowering key interest rates for the central bank.

The Federal Open Market Committee’s first cut this year came amid signs that both workers’ demand and demand are simultaneously declining, while the short-term impact from tariffs is increasing inflation.

In a speech to business leaders in Providence, Rhode Island, Powell said the Fed’s job is to balance “both sides of the dual mission” due to stable prices and low unemployment.

“The short-term risk to inflation is leaning upside down, and the risk to employment is a challenging situation,” he said. “Both-sided risk means there is no risk-free pass.”

Powell, as explained in the speech, is consistent with stagflation, where growth slows and inflation increases. The current situation is far less severe than what the US encountered in the 1970s and early ’80s, but it still presents policy challenges to the Fed.

However, Powell said he is satisfied with the central bank’s current policy path, indicating the possibility of additional cuts if the FOMC deems richer.

“The increased negative risk to employment has changed the balance of risk to achieve our goals,” he said. “This policy stance I still think is modestly restricted, puts us well in order to accommodate potential economic development.”

The stock price fell during Powell’s presentation. He said the assets are “very highly regarded” during the quality and response period.

In the labor market, Powell pointed to a “significant slowdown” in supply and demand. “In this dynamic, slightly softer labor market, the downside to employment is rising,” he said.

In fact, payroll growth has slowed dramatically, averaging under 30,000 over the summer months, while benchmark revisions showed that there were almost 1 million fewer jobs created 12 months before March 2025.

At the same time, since peaking in 2022 for over 40 years, inflation has cooled considerably, but has well surpassed the Fed’s 2% target. Commerce Department data, released Friday, is expected to show that consumer prices rose 2.7% on a full-item basis per year, and 2.9% when food and energy were excluded, Powell said.

In addition to uncertainty, there is the impact of President Donald Trump’s tariffs. The president continues to negotiate with his major US trading partners on the final level of his duties as he will carry out a key deadline with China in early November. For now, Fed economists view tariffs as primarily temporary price increases, but that could change.

“Uncertainty about the path of inflation remains high,” Powell said. “We carefully assess and manage the risk of higher, more sustained inflation, and we will ensure that this one-off price increase does not become an ongoing inflation problem.”

Powell governs the Fed, which has been heavily criticized by the White House, and there is an unusually wide dispersion among the authorities. The FOMC meeting concluded with participants narrowly splitting 10-9 on whether one or two quarter point cuts this year. Trump appointee Stephen Milan is seeking a much more offensive course, but his term as governor ends in January.

Earlier on Tuesday, Gov. Michelle Bowman warned of the dangers of moving slowly to tackle the labor market. “We already have a serious risk of being behind the curve in dealing with the worsening labor market situation,” said Bowman, who is also a Trump appointee.

“I’m worried about the labour market being able to enter a volatile phase and there’s a risk that the shock could lean it towards sudden and serious degradation,” she said.

While Powell doesn’t offer his expectations for future rate moves, Bowman said he hopes his recent actions will be a “first step” in the ongoing move back to neutral interest rate levels.