US labor market cooling from overheated conditions – Fed

HOUSTON (ICIS)–The US labor market has cooled from its overheated conditions two years ago, but the Federal Reserve still wants more signs that inflation is approaching its goal of 2% before it starts lowering its benchmark interest rate, the chairman of the central bank said on Wednesday.

Earlier, the Federal Reserve voted to maintain interest rates at 5.25-5.5%. It also lowered its forecast for future rate cuts to one quarter-point decline, down from three in its last forecast in March.

The Fed also slightly increased its forecast for inflation.

The US central bank has a dual mandate of promoting maximum employment and price stability.

Earlier in the decade, the nation’s ultra-tight labor market contributed to wage inflation.

The labor market remains strong, but it is gradually cooling and rebalancing, said Jerome Powell, Fed chairman. He made his comments during a press conference following the Fed’s interest rate announcement.

Job openings remain high and exceed the number of unemployed people. Wages are running above a sustainable path, Powell said.

Still, those job openings have fallen from even higher levels, he said. Increased immigration and higher rates of labor participation have helped restore balance in the job market.

Powell said the current US labor market is comparable to the years immediately before the COVID-19 pandemic, when the unemployment rate reached multidecade lows.

In addition to the cooling labor market, Powell highlighted the May consumer price index (CPI), a measure of inflation that was published earlier on Wednesday.

Month on month, the CPI was unchanged.

“We welcome today’s reading and hope for more like that,” Powell said.

The Fed itself noted that inflation has made modest progress in recent months in approaching its 2% target.

Still, Powell stressed that the Federal Reserve needs more signs that inflation is under control before it will start loosening monetary policy and lowering rates.

In fact, when data like the CPI is released on the same day that the Fed publishes its economic forecasts, most members do not update their projections, Powell said. “You don’t want to be too motivated by a single data point.”

The need for more data helps explain why the Fed increased its forecast for 2024 inflation while noting modest progress towards meeting the 2% goal.

That progress took place in recent months. Progress needs to continue before the Fed is confident that it can start lowering interest rates without triggering an even faster rate of inflation.