by Federal Reserve officials left interest rates unchanged this week and signaled that their next step would likely be a cut. As they contemplate when to reduce borrowing costs, new data on the labor market is likely to remain the focus.
Federal Reserve Chairman Jerome H. Powell made clear during his Wednesday news conference that the central bank is not hell-bent on keeping interest rates high just to slow the labor market. Federal Reserve officials are happy to see employers hiring and wages rising as long as inflation continues to decline, Powell said.
On the other hand, a cooling of the labor market could prompt the Federal Reserve to reduce interest rates sooner rather than later.
“If we were to see an unexpected weakening, certainly in the labor market, that would certainly influence cuts sooner,” Powell said.
But for now, job creation has continued at a solid pace and the economy is growing at a rapid pace. If this continues, the Federal Reserve will likely focus more on inflation as it contemplates when and how much to cut rates. The central bank’s policy rate is now pegged at 5.25 to 5.5 percent, a level high enough that economists think it will cool the economy as it filters through financial markets and weighs on mortgages, credit cards and business loans.
Powell suggested that the Fed would like to see more evidence that inflation is under control before it begins to reduce borrowing costs, and that it was unlikely to have enough data to rely on that before the central bank’s next meeting in March.
In particular, Powell suggested that the Federal Reserve is willing to be patient while waiting for wage growth to slow to normal levels. Some economists think the current relatively rapid pace of wage growth could prevent inflation from leveling off at 2 percent over time, if it prevails.
“I think in many respects the labor market is at or near normal, but not fully back to normal,” Powell said. “Job offers have not gone back to what they were before” and salary increases “have not gone back to what they were before.”
He added that wage increases “will probably take a couple of years to recover, and that’s okay.”
