Federal Reserve Chair Jerome Powell on Tuesday reiterated that policymakers face a difficult balancing act as they consider the path of interest rates.
Speaking at the Greater Providence Chamber of Commerce in Rhode Island, Powell warned that the risks facing both inflation and employment make the outlook unusually challenging.
Two-sided risks complicate policy path
Powell emphasized that near-term risks to inflation remain tilted to the upside, while downside risks have grown for employment.
“Two-sided risks mean that there is no risk-free path,” Powell said, underlining the difficult environment facing the central bank.
The remarks followed the Fed’s decision last week to lower its benchmark interest rate for the first time in 2025, cutting the federal funds rate to a range of 4%–4.25%.
Powell described the move as a “risk-management cut” aimed at addressing growing signs of labor market weakness.
However, he offered no clear signal on whether he would support another rate cut at the Fed’s upcoming meeting in October.
The comments also come amid growing divergence among policymakers about the appropriate pace of easing.
Updated quarterly projections showed a median forecast of two more quarter-point cuts this year, but several officials anticipate only one additional move, or none at all.
Labor market pressures intensify
Recent economic data and revisions have highlighted a marked slowdown in job creation, complicating the Fed’s assessment of labor conditions.
Powell noted that both supply and demand for workers have weakened, a development he described as “unusual and challenging.”
He pointed to the impact of tighter immigration policies under President Donald Trump, which have reduced labor supply and contributed to a softer employment backdrop.
“In this less dynamic and somewhat softer labor market, the downside risks to employment have risen,” Powell said.
While the Fed has moved to provide some support through rate cuts, Powell stressed that the weakening labor outlook must be weighed carefully against the risk of reigniting inflation.
Inflation pressures and market conditions
On the inflation side, Powell highlighted concerns that tariff increases under the Trump administration could create persistent upward pressure on prices.
He said higher tariffs will likely filter through supply chains over time, causing a one-time increase in prices that could be spread across several quarters.
Goods prices, in particular, are driving recent inflation data, he added.
“Incoming data and surveys suggest that those price increases largely reflect higher tariffs rather than broader price pressures,” Powell said.
Financial markets, meanwhile, have responded positively to expectations of easing.
Stocks and other assets rallied ahead of the Fed’s September meeting and have continued to climb since the rate cut, with major equity indices setting fresh records.
Powell acknowledged that asset prices, particularly equities, are at elevated levels.
Still, he downplayed broader risks, saying this is “not a time of elevated financial stability risks.”
“We do look at overall financial conditions, and we ask ourselves whether our policies are affecting financial conditions in a way that is what we’re trying to achieve,” Powell said.
The Fed’s next policy decision in October will hinge on how incoming labor and inflation data shape officials’ views, as they attempt to navigate what Powell called a “challenging situation” with no easy options.
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