At Jackson Hole, Fed Faces Pivotal Test On Unemployment (Video)

WASHINGTON, Aug 19 (Reuters) – Four years after Federal Reserve Chair Jerome Powell made fighting unemployment a bigger priority during the COVID-19 pandemic, he faces a pivotal test of that commitment amid rising joblessness, mounting evidence inflation is under control, and a benchmark interest rate that is still the highest in a quarter of a century.

High interest rates may be on the way out, with the U.S. central bank expected to deliver a first cut at its Sept. 17-18 meeting and Powell potentially providing more information about the approach to the policy easing in a speech on Friday at the Kansas City Fed’s annual conference in Jackson Hole, Wyoming.

But with the Fed’s policy rate in the 5.25%-5.50% range for more than a year, the impact of relatively high borrowing costs on the economy may still be building and could take time to unwind even if the central bank starts cutting – a dynamic that could put hopes for a “soft landing” of controlled inflation alongside continued low unemployment at risk.

“Powell says the labor market is normalizing,” with wage growth easing, job openings still healthy, and unemployment around what policymakers see as consistent with inflation at the central bank’s 2% target, former Chicago Fed President Charles Evans said. “That would be great if that is all there is. The history is not good.”

Indeed, increases in the unemployment rate like those seen in recent months are typically followed by more.

“That does not seem the situation now. But you may only be one or two poor employment reports away” from needing aggressive rate cuts to counter rising joblessness, Evans said. “The longer you wait, the actual adjustment becomes harder to make.”

Evans was a key voice in reframing the Fed’s policy approach, unveiled by Powell at Jackson Hole in August 2020 as the pandemic was raging, policymakers were gathering via video feed, and the unemployment rate was 8.4%, down from 14.8% that April.

In that context the Fed’s shift seemed logical, changing a long-standing bias towards heading off inflation at the expense of what policymakers came to view as an unnecessary cost to the job market.

Standard monetary policymaking saw inflation and unemployment inextricably and inversely linked: Unemployment below a certain point stoked wages and prices; weak inflation signaled a moribund job market. Officials began to rethink that connection after the 2007-2009 recession, concluding they needn’t treat low unemployment as an inflation risk in itself.