Jerome H. Powell, the chair of the Federal Reserve, on Tuesday underscored the “challenging situation” confronting the central bank as its officials debate how quickly to lower interest rates without either stoking inflation or worsening a weakening labor market.
“Near-term risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation,” Mr. Powell said in a speech at an event in Rhode Island. “Two-sided risks mean that there is no risk-free path.”
“If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2 percent inflation,” he added. “If we maintain restrictive policy too long, the labor market could soften unnecessarily.”
The Fed chair’s comments come on the heels of the central bank’s decision last week to lower interest rates for the first time this year to a new range of 4 percent to 4.25 percent. At the time, Mr. Powell called it a “risk management” move to protect the labor market.
On Tuesday, Mr. Powell described the Fed’s policy settings as still “modestly restrictive,” meaning interest rates at current levels are still helping to keep a lid on inflation. He stressed that the central bank was also “well positioned to respond to potential economic developments.”
Projections released alongside last week’s decision showed most Fed officials expected interest rates to decline another half a percentage point this year to a range of 3.5 percent to 3.75 percent. But there is a range of views among the Fed’s 19 policymakers about the path forward for interest rates — differences that stem from varying opinions on the health of the economy and the extent of the inflation threat posed by President Trump’s tariffs.
While the unemployment rate remains relatively low, at 4.3 percent, monthly jobs growth has slowed sharply, and there are other signs that companies are pulling back on hiring. Consumer prices have also started rising again, pushing inflation further from the Fed’s 2 percent target.
Against this backdrop, six policymakers penciled in no more cuts this year in the latest projections. One official submitted what is known as a “soft dissent” by writing down a forecast for interest rates to stay at the previous level of 4.25 percent to 4.5 percent. Another two predicted only one more quarter-point reduction.
The Fed’s newest member, Stephen Miran, stood apart from the rest, signaling that interest rates should be roughly 2 percentage points lower than current levels at around 2.5 percent.
In his first speech in the role on Monday, Mr. Miran warned that failing to reduce borrowing costs substantially “risks unnecessary layoffs and higher unemployment.” Mr. Miran, who is taking only a temporary leave of absence from the White House as one of the president’s top economic advisers, officially opposed the Fed’s decision last week in favor of a larger, half-point move. His projections suggest he wants the central bank to deliver two more half-point reductions at its two remaining meetings this year.
While Mr. Miran is an outlier at the Fed in terms of his projections for interest rates, he is not alone in expressing caution about the labor market. Earlier on Tuesday, Michelle Bowman, the Fed’s vice chair for supervision, said it had become “more fragile and could deteriorate more significantly in the coming months.”
“Now that we have seen many months of deteriorating labor market conditions, it is time for the committee to act decisively and proactively to address decreasing labor market dynamism and emerging signs of fragility,” she said. Ms. Bowman, who voted for last week’s quarter-point cut, suggested she would support larger reductions if the labor market continued to show signs of weakness.
But forging consensus for more aggressive interest rate reductions is likely to be challenging given ongoing concerns that other policymakers have about inflation. The fear is that easing up the degree of restraint on the economy too quickly could risk stoking price pressures and turning what many expect to be a temporarily blip in inflation because of tariffs into a more persistent problem.
Mr. Powell on Tuesday reiterated that the Fed’s view was for tariffs to only temporarily lift inflation, even if the effect of those policies will take time to filter across the economy.
“A ‘one-time’ increase does not mean ‘all at once,’” he said. “This one-time increase in the price level will likely be spread over several quarters and show up as somewhat higher inflation during that period.”
The Fed chair insisted, however, that the central bank would ensure that “this one-time increase in prices does not become an ongoing inflation problem.”