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Washington — Federal Reserve officials have said they’re increasingly confident that they’ve nearly tamed inflation. Now, it’s the health of the job market that’s starting to draw their concern.

With inflation cooling toward its 2% target, the pace of hiring slowing and the unemployment rate edging up, the Fed is poised to cut its benchmark interest rate next month from its 23-year high. How fast it may cut rates after that, though, will be determined mainly by whether employers keep hiring. A lower Fed benchmark rate would eventually lead to lower rates for auto loans, mortgages and other forms of consumer borrowing.

Chair Jerome Powell will likely provide some hints about how the Fed sees the economy and what its next steps may be in a high-profile speech Friday in Jackson Hole, Wyoming, at the Fed’s annual conference of central bankers. It’s a platform that Powell and his predecessors have often used to signal changes in their thinking or approach.

Powell will likely indicate that the Fed has grown more confident that inflation is headed back to the 2% target, which it has long said would be necessary before rate cuts would begin.

Economists generally agree that the Fed is getting closer to conquering high inflation, which brought financial pain to millions of households beginning three years ago as the economy rebounded from the pandemic recession. Few economists, though, think Powell or any other Fed official is prepared to declare “mission accomplished.”

“I don’t think that the Fed has to fear inflation,” said Tom Porcelli, U.S. chief economist at PGIM Fixed Income. “At this point, it’s right that the Fed is now more focused on labor versus inflation. Their policy is calibrated for inflation that is much higher than this.”

Still, how fast the Fed cuts rates in the coming months will depend on what the economic data shows. After the government reported this month that hiring in July was much less than expected and that the jobless rate reached 4.3%, the highest in three years, stock prices plunged for two days on fears that the U.S. might fall into a recession. Some economists began speculating about a half-point Fed rate cut in September and perhaps another identical cut in November.

But healthier economic reports last week, including another decline in inflation and a robust gain in retail sales, have largely dispelled those concerns. Wall Street traders now expect three quarter-point Fed cuts in September, November and December, though in December it’s nearly a coin-toss between a quarter- and a half-point cut. Mortgage rates have already started to decline in anticipation of a rate reduction.

A half-point Fed rate cut in September would become more likely if there were signs of a further slowdown in hiring, some officials have said. The next jobs report will be issued on Sept. 6, after the Jackson Hole conference but before the Fed’s next meeting in mid-September.

Raphael Bostic, president of the Fed’s Atlanta branch, said in an interview Monday with The Associated Press that “evidence of accelerating weakness in labor markets may warrant a more rapid move, either in terms of the increments of movement or the speed at which we try to get back” to a level of rates that no longer restricts the economy.

Even if hiring stays solid, the Fed is set to cut rates this year given the steady progress that’s been made on inflation, economists say. Last week, the government said consumer prices rose just 2.9% in July from a year ago, the smallest such increase in more than three years.

Bostic noted that the economy has changed from just a couple of months ago, when he was suggesting that a rate cut might not be necessary until the final three months of the year.

“I’ve got more confidence that we are likely to get to our target for inflation,” he said. “And we’ve seen labor markets weaken considerably relative to where they were” last year. “We might need to shift our policy stance sooner than I would have thought before.”

Both Bostic and Austan Goolsbee, president of the Fed’s Chicago branch, say that with inflation falling, inflation-adjusted interest rates — which are what many businesses and investors pay most attention to — are rising even as inflation has slowed. When the Fed first set its key rate at its current 5.3%, inflation — excluding volatile energy and food costs — was 4.7%. Now, it’s just 3.2%.

“Our policies are getting tighter with every moment in that type of situation,” Bostic said. “We have to be concerned” that rates are so high they could cause an economic slowdown.

Still, Bostic said that for now, the job market and the economy appear mostly healthy, and he still expects a “soft landing,” whereby inflation falls back to the Fed’s 2% target without a recession occurring.

With the economy’s outlook unclear and the Fed focusing heavily on what future data shows, there may be only so much Powell will be able to say Friday about the central bank’s next steps.

Given the Fed’s focus on how the economic data comes in, “it will be difficult for Powell to pre-commit to a particular trajectory at Jackson Hole,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, said in a research note.
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CHENNAI — A group of Indian port workers’ unions has called for a strike from Aug. 28 to demand immediate settlement of pay revisions and pension benefits, according to a note signed by its members. 

A strike by India’s port workers could exacerbate the existing congestion issues at Asian and European ports, leading to further delayed shipments, which have a global impact on trade and commerce. 

The country’s shipping ministry formed a bipartite wage negotiation committee in March 2021, and the workers submitted their demands six months later, ahead of the expiration of the previous agreement in December of that year, according to the note. 

Although the wage negotiation committee met seven times, it failed to meet the port workers’ demands, the note said. 

The workers’ group agreed to call for a strike after a meeting this month in Thoothukudi, a port city in the southern state of Tamil Nadu.  

The government and port management should consider demands such as pay scale revisions, payment of arrears and protection of exiting benefits to help avoid the strike, the workers’ group said in the note. 

India’s federal shipping ministry did not immediately respond to a Reuters request for comment. 

The annual cargo handling capacity of major Indian ports such as Chennai, Cochin and Mumbai totaled 1.62 billion metric tons, according to the shipping ministry. 

In the fiscal year to March 31, 2024, India exported goods worth $437 billion, with imports estimated at $677 billion. 

 
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Washington — Four years after Federal Reserve Chair Jerome Powell made fighting unemployment a bigger priority during the COVID-19 pandemic, he faces a pivotal test of that commitment amid rising joblessness, mounting evidence inflation is under control, and a benchmark interest rate that is still the highest in a quarter of a century.   

High interest rates may be on the way out, with the U.S. central bank expected to deliver a first cut at its Sept. 17-18 meeting and Powell potentially providing more information about the approach to the policy easing in a speech on Friday at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming.   

But with the Fed’s policy rate in the 5.25%-5.50% range for more than a year, the impact of relatively high borrowing costs on the economy may still be building and could take time to unwind even if the central bank starts cutting — a dynamic that could put hopes for a “soft landing” of controlled inflation alongside continued low unemployment at risk.   

“Powell says the labor market is normalizing,” with wage growth easing, job openings still healthy, and unemployment around what policymakers see as consistent with inflation at the central bank’s 2% target, former Chicago Fed President Charles Evans said. “That would be great if that is all there is. The history is not good.”   

Indeed, increases in the unemployment rate like those seen in recent months are typically followed by more.   

“That does not seem the situation now. But you may only be one or two poor employment reports away” from needing aggressive rate cuts to counter rising joblessness, Evans said. “The longer you wait, the actual adjustment becomes harder to make.” 

Inflation versus employment  

Evans was a key voice in reframing the Fed’s policy approach, unveiled by Powell at Jackson Hole in August 2020 as the pandemic was raging, policymakers were gathering via video feed, and the unemployment rate was 8.4%, down from 14.8% that April.   

In that context the Fed’s shift seemed logical, changing a long-standing bias towards heading off inflation at the expense of what policymakers came to view as an unnecessary cost to the job market.   

Standard monetary policymaking saw inflation and unemployment inextricably and inversely linked: Unemployment below a certain point stoked wages and prices; weak inflation signaled a moribund job market. Officials began to rethink that connection after the 2007-2009 recession, concluding they needn’t treat low unemployment as an inflation risk in itself.   

As a matter of equity for those at the job market’s margins, and to achieve the best outcomes overall, the new strategy said Fed policy would “be informed by assessments of the shortfalls of employment from its maximum level.”   

“This change may appear subtle,” Powell said in his 2020 speech to the conference. “But it reflects our view that a robust job market can be sustained without causing an outbreak of inflation.”   

A pandemic-driven inflation surge and dramatic employment recovery made that change seem irrelevant: The Fed had to raise rates to tame inflation, and until recently the pace of price increases had slowed without much apparent damage to the job market. The unemployment rate through April had been below 4% for more than two years, an unparalleled streak not seen since the 1960s. The unemployment rate since 1948 has averaged 5.7%.   

But the events of the last two years, and a coming Fed strategy review, have also triggered a wave of research into exactly what happened: why inflation fell, what role policy played in that, and how things might be done differently if inflation risks rise again.   

While the agenda for this year’s conference remains under wraps, the broad theme focuses on how monetary policy influences the economy. That bears on how officials may evaluate future choices and tradeoffs and the wisdom of tactics like preempting inflation before it starts.   

Some of that work is already emerging from Fed researchers, including top economist Michael Kiley. He has authored a paper questioning whether policy “asymmetry” — treating employment shortfalls differently than a tight labor market, for example — really helps. Another recent paper suggested policymakers who believe public inflation expectations are formed in the short-run and are volatile should react sooner and raise rates higher in response.   

The role public expectations play in driving inflation — and the policy response – was on full display in 2022. When it appeared expectations risked moving higher, the Fed pushed its tightening cycle into overdrive with 75-basis-point hikes at four consecutive meetings. Powell then used a truncated Jackson Hole speech to emphasize his commitment to fight inflation —a stark shift from his jobs-first commentary two years earlier.   

It was a key moment that put the U.S. central bank’s seriousness on display, underpinned its credibility with the public and markets, and rebuilt some of the standing that preemptive policies had lost.   

‘Too tight’ 

Powell now faces a test in the other direction. Inflation is progressing back to 2%, but the unemployment rate has risen to 4.3%, up eight-tenths of a percentage point from July 2023.   

There’s debate over what that really says about the labor market versus rising labor supply, a positive thing if new job seekers find employment.   

But it did breach a rule-of-thumb recession indicator, and while that has been downplayed given other indicators of a growing economy, it also is slightly above the 4.2% that Fed officials regard as representing full employment.   

It’s also higher than at any point in Powell’s pre-pandemic months as Fed chief: It was 4.1% and falling when he took over in February 2018.   

The “shortfall” in employment that he promised to respond to four years ago, in other words, may already be taking shape.   

While Powell will be reluctant to ever declare victory over inflation for fear of touching off exuberant overreaction, Ed Al-Hussainy, senior global rates strategist at Columbia Threadneedle Investments, said it was past time for the Fed to get in front of the risk to unemployment – preemption of a different sort.   

Al-Hussainy said the Fed had proved its ability to keep public expectations about inflation in check, an important asset, but that “also has put in motion some downside risk to employment.”   

“The policy stance today is offside — it is too tight — and that warrants acting on.” 
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