When the Federal Reserve began cutting rates in September, inflation cooled and the labor market showed 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 pause its campaign of rate cuts at its meeting this month, a message reinforced by Fed officials in a series of speeches this week.
“While this is not my baseline outlook, I cannot rule out the risk that progress on inflation will continue to stall,” Fed Governor Michelle Bowman said in a speech on Thursday.
Ms. Bowman, the only Fed official to oppose the central bank's half-point rate cut in September, voted in favor of last month's more traditional quarter-point cut. But in her speech she said she “could have supported” keeping rates steady in December, and hinted that she was unlikely to support a January cut unless economic conditions improved before that meeting at the end of the month would change significantly.
“In light of these considerations, I continue to favor a cautious and gradual approach to policy adjustments,” Ms Bowman said.
The Fed can afford to be cautious because the labor market has remained strong. After the summer panic, the unemployment rate has stabilized, job growth has recovered and layoffs have remained low. That gives policymakers confidence that they can keep interest rates at around 4.4 percent without running the immediate risk of a sharper economic slowdown.
“The strength of the economy allows us to be patient,” Jeff Schmid, 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 policy-setting Open Market Committee at its January meeting.
The bigger question is what happens if the economy, and in particular the labor market, weakens while inflation remains persistent.
“The labor market is now roughly in equilibrium,” Mary Daly, president of the Federal Reserve Bank of San Francisco, said in a panel discussion Saturday. “At this point, I wouldn't want to see any further slowdown in the labor market.”
There have been some indications in recent months that the labor market is weakening, even as unemployment has remained low. Hiring has weakened further and the unemployed are taking longer to find jobs. As these trends become clearer, policymakers may decide they need to cut rates further, said Nancy Vanden Houten, a senior economist at Oxford Economics.
“If hiring were to slow further or layoffs were to increase a little, I think the picture could change,” she said.
Fed officials will closely watch Friday's employment data for signs of further weakness. But they have indicated that it will take more than one weak report to convince them that the labor market is deteriorating.
Ms Bowman said on Thursday that rapidly changing trends in immigration, along with other factors, had made the monthly jobs figures harder to interpret, which she said should make policymakers more cautious.
And Susan Collins, president of the Federal Reserve Bank of Boston — who like Mr. Schmid will vote on policy decisions this year — warned in a speech Thursday against “overreacting to individual data readings” and said she is “concerned about the fragility of the emerging labor market has declined.”
