Federal Reserve Chair Jerome Powell has issued a warning about the risks posed by geopolitical tensions and the cooling labor market, urging caution in response. Powell expressed concern over the heightened levels of geopolitical tensions, particularly citing the recent attack on Israel and the potential for further loss of innocent lives. He also highlighted signs of the labor market cooling, stating that a sustainable return to 2% inflation would likely require a period of below-trend growth and some softening in labor market conditions.
The tightening campaign led by Powell is reportedly the most rapid since former Chair Paul Volcker’s efforts to combat inflation in the late 1970s. However, the recent surge in longer-term Treasury yields since July has prompted some officials, such as Vice Chair Philip Jefferson, to pay more attention to overall financial conditions when considering their next move. Two-year Treasury yields reached a 17-year high on Tuesday, while 10-year notes approached their peak for the year.
While the Fed remains committed to achieving a 2% inflation target, the minutes from the September meeting reveal that officials are now considering the risk of excessive restraint that could potentially push the economy into a downturn. Powell acknowledged the complexities of their task, stating that uncertainties, both new and old, add challenges to striking the right balance between tightening monetary policy too much or too little.
In summary, Powell’s warning serves as a reminder of the growing geopolitical risks and the cooling labor market’s potential impact. The Fed’s intention to achieve 2% inflation remains intact, but they are now cautious about the risk of overly restrictive measures that could harm the economy. Achieving the right monetary policy balance amidst uncertainties continues to be a challenge for the central bank.
