Unemployment is the Fed's biggest enemy now, Powell says - not inflation.

By Jeffry Bartash

'We will do everything we can to support a strong labor market,' Fed chairman says

The chief of the Federal Reserve has vowed to do whatever it takes to stop the unemployment rate from rising, which could push the U.S. economy into a recession.

"We do not seek or welcome further cooling in labor-market conditions," Fed Chairman Jerome Powell said bluntly Friday in a speech laying out the case for a reduction in high interest rates.

The Fed has "ample room to respond to any risks we may face," he added, "including the risk of unwelcome further weakening in labor-market conditions."

Recap: Coverage of Jerome Powell's remarks in Jackson Hole, Wyo.

The Fed is primed to cut interest rates in September after holding them at a 24-year high for the past year to subdue high inflation.

Now that inflation is gradually slowing toward its 2% annual goal, the Fed has shifted its focus to rising unemployment. The Fed is required by law to maintain both low inflation and a strong labor market.

"The upside risks to inflation have diminished," Powell said in a widely anticipated speech at the Fed's summer retreat in Jackson Hole, Wyo. "And the downside risks to employment have increased."

Read next: Fed chief signals in Jackson Hole that weak August jobs data would punch ticket to half-point rate cut

The clearest sign? The unemployment rate has experienced a surprising surge, rising to a nearly three-year high of 4.3% as of July from an ultra-low 3.4% just a year and a half ago.

Already the jobless rate has exceeded the Fed's year-end forecasts for 2024, 2025 and 2026.

"We are not just fighting inflation now," Chicago Fed President Austan Goolsbee said in an interview with CNBC. "There are concerned warning lights from parts of the jobs market."

Other measures of the labor market, such as employment increases and job openings, have also softened considerably.

Last week, the government said the U.S. economy had created 818,000 fewer jobs than previously reported from the spring of 2023 to the spring of 2024.

"Inflation is now taking a backseat to the labor market," said chief U.S. economist Ryan Sweet of Oxford Economics. "The Fed will not tolerate more increases" in the unemployment rate.

Unlike past Fed chiefs, Powell has placed great weight publicly on the benefits of a low unemployment rate during his tenure as chairman. He's taken special pride in an improvement in labor conditions among minorities and in less well-off parts of the country.

"In the years just prior to the pandemic, we saw the significant benefits to society that can come from a long period of strong labor market conditions," he said.

"Low unemployment, high participation, historically low racial employment gaps, and, with inflation low and stable, healthy real wage gains that were increasingly concentrated among those with lower incomes," Powell said of the benefits from a strong labor pool.

The Fed chairman stressed the jobs market is still in fairly good shape. He pointed out the increase in unemployment mainly stems from more workers entering the labor force and "a slowdown from the previously frantic pace of hiring."

The number of people losing jobs or getting fired, he noted, remained remarkably low.

"So far, rising unemployment has not been the result of elevated layoffs, as is typically the case in an economic downturn," he said.

What's also been unusual, Powell said, is the labor market has not been a source of inflation. Past episodes of high U.S. inflation have often been driven by a tight labor market and rising wages.

The lack of inflation stemming from the labor market, Powell signaled, gives the Fed more scope to lower interest rates. By reducing borrowing costs, the Fed will give the economy a boost - and even spur more hiring.

Hence Powell's vow the Fed will do whatever it takes to keep employment levels high.

"We will do everything we can to support a strong labor market," he promised.

-Jeffry Bartash

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08-25-24 1806ET

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