Federal Reserve officials left interest rates unchanged this week, signaling that their next move is likely to be a cut. As they ponder when to cut borrowing costs, incoming data on the labor market is likely to be the focus.
Federal Reserve Chairman Jerome H. Powell made it clear during his news conference on Wednesday that the Fed is not bent on keeping interest rates high to slow the labor market. Fed officials are happy to see employers hiring and wages rising as long as inflation remains subdued, Mr. Powell said.
On the other hand, a cooling job market could prompt the central bank to cut interest rates sooner.
“If we see an unexpected weakening, certainly in the labor market, it will certainly be reduced quickly,” Mr. Powell said.
But for now, job gains continue at a solid pace and the economy is growing at a rapid clip. If that continues, the central bank is likely to focus more on inflation as it decides when and how much to cut rates. The central bank's policy rate is now set at 5.25 to 5.5 percent, which economists think will cool the economy as it weighs on financial markets and mortgage, credit card and business lending.
The central bank wants to see more evidence that inflation is under control before it starts cutting borrowing costs, and there is unlikely to be enough data to feel confident before the central bank's next meeting in March, Mr. Powell suggested.
Notably, Mr. Powell suggested the Fed was willing to be patient until wage growth slowed to normal. Some economists think today's relatively rapid wage gains could prevent inflation from settling at 2 percent over time.
“I think the labor market is at or near normal by many measures, but not quite back to normal,” Mr. Powell said. “Job opportunities are not back to where they were,” and wage increases “are not back to where they were.”
He added that wage increases “will probably take a couple of years to go all the way back, and that's OK.”