When the Federal Reserve began cutting interest rates in September, inflation was easing and the labor market was showing some worrying signs of weakness.
Three months and a full percentage point of rate cuts later, the opposite is true: the labor market appears to have stabilized, but progress on inflation has stalled.
As a result, the central bank is widely expected to halt its campaign for rate cuts at its meeting this month, a message reinforced by Fed officials in a series of speeches this week.
“While not my main outlook, I cannot rule out the risk that progress on inflation will continue to lag,” Fed Chair Michelle Bowman said in a speech on Thursday.
Ms. Bowman, the only Fed official to oppose a half-point interest rate cut in September, voted in favor of last month’s more traditional quarterly cut. But in her speech, she said she “could support” keeping rates steady in December and hinted she was unlikely to back a cut in January unless economic conditions changed significantly before the meeting at the end of the month.
“In light of these considerations, I continue to favor a cautious and gradual approach to policy adjustment,” Ms. Bowman.
The Fed can afford to be cautious because the labor market has remained strong. After a summer scare, the unemployment rate has stabilized, job growth has rebounded and layoffs have remained low. That gives policymakers confidence that they can keep interest rates at around 4.4% without running any immediate risk of triggering a bigger economic slowdown.
“The strength of the economy allows us to be patient,” Jeff Schmidt, president of the Federal Reserve Bank of Kansas City, said in a speech Thursday. Mr. Schmid will become a voting member of the Fed’s policymaking Open Market Committee at its January meeting.
The bigger question is what will happen if the economy, and in particular the labor market, weakens while inflation remains stubborn.
“The labor market is now in rough balance,” Mary Daly, president of the Federal Reserve Bank of San Francisco, said at a panel discussion on Saturday. “At this point, I would not like to see a further slowdown in the labor market.”
In recent months there have been some signs that the labor market is softening, although the unemployment rate remains low. Hiring has continued to weaken and it is taking longer for the unemployed to find work. If these trends become more pronounced, policymakers may decide they need to cut interest rates further, said Nancy Vanden Houten, senior economist at Oxford Economics.
“If hiring slows down more or layoffs pick up a little bit, I think the picture could start to change,” he said.
Fed officials will closely monitor Friday’s employment data for signs of further weakness. However, they have shown that it will take more than one weak report to convince them that the labor market is worsening.
Ms. Bowman said Thursday that rapidly changing immigration trends, along with other factors, made the monthly jobs numbers harder to interpret, which he said should make policymakers more cautious.
And Susan Collins, president of the Federal Reserve Bank of Boston — who, like Mr. Schmidt, who will have a vote on policy decisions this year – warned in a speech on Thursday against “overreacting to isolated data readings” and said her “concerns about the fragility of the emerging labor market have diminished.”
