Fed Chair Powell delivered another quarter-point rate cut this week, but what caught my attention wasn’t the cut itself – it was the fundamental shift in how the Fed is viewing economic risks. This changes everything about their policy trajectory.
The Numbers Tell a Stark Story
In his latest press conference remarks, Powell laid out data that reveals just how dramatically the labor market has deteriorated. The unemployment rate edged up to 4.3% in August, and here’s the kicker – payroll job gains have slowed to just 29,000 per month over the past three months.
What’s particularly striking is Powell’s acknowledgment of how much the narrative has changed since July. Back then, he could still describe the labor market as being “in solid condition” with around 150,000 jobs per month. That assessment is no longer tenable.
The revised job creation numbers tell an even more concerning story. The preliminary benchmark revisions showed we overcounted jobs by about 911,000 – nearly a million jobs that we thought existed but didn’t. Powell noted this was “almost exactly what we expected,” suggesting the Fed had been bracing for this data correction.
Why This Cut Is Different
Powell characterized this as a “risk management cut” – essentially taking out insurance against further labor market deterioration. The pattern here suggests the Fed sees something brewing that requires preemptive action.
What stands out in these developments is how Powell described the current situation as “quite unusual.” Ordinarily, when the labor market weakens, inflation is low. When the labor market is strong, that’s when you worry about inflation. Right now, we have both risks simultaneously.
Inflation remains elevated at 2.7% for total PCE prices and 2.9% for core PCE – both well above the Fed’s 2% target. Yet unemployment is ticking up and job creation is slowing dramatically. This creates what Powell called “two-sided risk” with “no risk-free path.”
The Immigration and AI Wild Cards
Powell spent considerable time addressing what’s driving labor market changes. The supply of workers has “obviously come way down” due to lower immigration and reduced labor force participation. At the same time, demand for workers has also declined sharply.
This creates what Powell called “a curious balance” – both supply and demand falling together, but with demand dropping more sharply, causing unemployment to edge up.
There’s also the AI factor. Powell acknowledged seeing “some effects” from AI on labor demand, particularly affecting young people coming out of college. Companies that traditionally hired recent graduates “are able to use AI more than they had in the past,” potentially reducing hiring needs.
Tariffs: The Persistent Inflation Risk
The tariff impact discussion revealed significant uncertainty about future inflation pressures. Powell noted that goods inflation, which was negative last year, is now running at 1.2% – a substantial change contributing to overall inflation.
The mechanics are particularly interesting. Powell explained that tariffs “are not mostly being paid by exporters” but rather by “companies that sit between the exporter and the consumer.” These middlemen are absorbing costs now but “have every intention of passing that through in time.”
The Fed’s base case remains that tariff effects will be “relatively short-lived” – a one-time price level shift rather than ongoing inflation. But Powell acknowledged it’s “also possible that the inflationary effects could instead be more persistent.”
What the Dot Plot Really Shows
Looking at the Fed’s latest projections, the dispersion of views is remarkable. Ten out of 19 participants wrote down two or more cuts for the remainder of the year, while nine wrote down fewer cuts – some expecting no more cuts at all.
Powell emphasized this uncertainty, encouraging people to view the projections “through the lens of probability” rather than certainty. The median projection shows rates at 3.6% by year-end, 3.4% by end-2026, and 3.1% by end-2027 – a full quarter-point lower than June projections.
The Quality of Labor Market Weakness
What’s particularly concerning is who’s being affected. Powell noted that “people who were sort of more at the margins” – college graduates, younger people, minorities – are “having a hard time finding jobs.”
The job-finding rate has fallen very low while the layoff rate remains low, creating a “low firing, low hiring environment.” Powell’s concern is that if layoffs do start, “the people who are laid off won’t” find new positions easily because “there won’t be a lot of hiring going on.”
This dynamic could “very quickly flow into higher unemployment” – explaining the Fed’s preemptive approach.
Market Implications Going Forward
This rate cut signals the Fed is taking labor market risks seriously while still monitoring inflation closely. The path ahead depends heavily on how job creation evolves and whether tariff-related price increases remain contained.
Looking at the numbers, GDP growth projections actually ticked up slightly to 1.6% this year and 1.8% next year. The unemployment projection remains at 4.5% by year-end. What changed was the risk assessment around the labor market.
Powell made clear they’re in “a meeting by meeting situation” with policy “not on a preset course.” For markets, this suggests continued volatility around employment data releases.
The Independence Question Looms
Powell fielded multiple questions about Fed independence, particularly regarding new board member Stephen Miran’s continued White House employment. His response emphasized the Fed’s culture: “It’s deeply in our culture to do our work based on the incoming data and never considering anything else.”
When pressed about public confidence polls showing Americans now trust the president more than the Fed on economic matters, Powell’s answer was straightforward: “We’re going to do everything we can to use our tools to achieve the goals that Congress has given us.”
What This Means for Investors
The Fed is walking a tightrope between competing risks. Their willingness to cut despite above-target inflation suggests they see disinflationary forces from labor market softening as the dominant trend.
For bond investors, this signals potential for additional cuts if employment conditions deteriorate further. For equity markets, the key will be whether this “soft landing” approach successfully prevents labor market weakness from accelerating.
The critical insight from Powell’s remarks: the Fed has shifted from primarily inflation-focused to genuinely balanced between their dual mandates. Whether they can successfully navigate this transition will determine both market direction and economic outcomes in the months ahead.