U.S. Federal Reserve Chair Jerome Powell speaks during a press conference, following the issuance of the Federal Open Market Committee’s statement on interest rate policy, in Washington, D.C., U.S., Sept. 17, 2025.
Elizabeth Frantz | Reuters
Federal Reserve Chair Jerome Powell said Tuesday that weakness in the labor market is outweighing concerns about stubborn inflation, leading to a decision he backed to lower the central bank’s key interest rate last week.
The Federal Open Market Committee’s first cut of the year came amid signs that both supply and demand of workers is waning at the same time that near-term impact from tariffs has pushed inflation higher.
At such times, Powell said, during a speech to business leaders in Providence, R.I., the Fed’s job is to “balance both sides of our dual mandate” for stable prices and low unemployment.
“Near-term risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation,” he said. “Two-sided risks mean that there is no risk-free path.”
The conditions Powell described in the speech are consistent with stagflation, in which growth slows and inflation is high. While the current situation is far less severe than what the U.S. encountered in the 1970s and early ’80s, it nonetheless has presented a policy challenge for the Fed.
Powell, however, said he is comfortable with the central bank’s current policy path though he indicated the possibility of additional cuts should the FOMC see the need to be more accommodative.
“The increased downside risks to employment have shifted the balance of risks to achieving our goals,” he said. “This policy stance, which I see as still modestly restrictive, leaves us well positioned to respond to potential economic developments.”
Watching jobs, inflation
On the labor market, Powell noted “a marked slowdown” in supply and demand. “In this less dynamic and somewhat softer labor market, the downside risks to employment have risen,” he said.
Indeed, payroll growth has slowed dramatically, averaging below 30,000 during the summer months while benchmark revisions showed nearly a million fewer jobs created in the 12 months prior to March 2025.
At the same time, inflation has cooled substantially since hitting a more than 40-year peak in 2022 but is still considerably above the Fed’s 2% goal. Commerce Department data to be released Friday is expected to indicate that personal consumption prices rose 2.7% on an annual all-items basis and 2.9% when excluding food and energy, Powell said.
Adding to uncertainty is the impact of President Donald Trump’s tariffs. The president continues to negotiate with major U.S. trading partners about the ultimate level for the duties, with a key deadline with China coming up in early November. Fed economists for now are viewing the tariffs as mostly a temporary rise in prices, though that could change.
“Uncertainty around the path of inflation remains high,” Powell said. “We will carefully assess and manage the risk of higher and more persistent inflation. We will make sure that this one-time increase in prices does not become an ongoing inflation problem.”
Powell is presiding over a Fed that has come under intense criticism from the White House and is seeing an unusually wide dispersion in views among officials. The FOMC meeting concluding with participants narrowly split, 10-9, over whether one or two more quarter-point cuts would be appropriate this year. Trump appointee Stephen Miran has pushed for a much more aggressive course, but his term as governor ends in January.
Earlier Tuesday, Governor Michelle Bowman warned about the dangers of moving too slow to address the labor market. Bowman, also a Trump appointee, said “we are at serious risk of already being behind the curve in addressing deteriorating labor market conditions.”
“I am concerned that the labor market could enter into a precarious phase and there is a risk that a shock could tip it into a sudden and significant deterioration,” she said.
While Powell has not provided his expectations for future rate moves, Bowman said she hopes the recent action is “the first step” in an ongoing move back to a neutral interest rate level.
