For months, Federal Reserve officials have concentrated most of their commentary on the threat of higher inflation stemming from the White House’s aggressive tariff program. But there has been a marked change since Labor Day, with four Fed officials using remarks Wednesday to try to explain an economy which appears to be slowing notably.
“I don’t see a recession in my forecast at all, but I do see slower growth through the year,” said Fed governor Christopher Waller, in an interview on CNBC.
“Many tariffs are taxes, and taxes are never particularly good for growth,” added Waller, who was appointed to the Fed board by President Donald Trump in his first term and is reportedly under consideration to become the board’s next chair.
The Fed officials’ comments come following a slew of data suggesting a slowdown. Their remarks add more fuel to investors’ expectations that the central bank will cut interest rates by at least 25 basis points at its meeting later this month.
Also see: Slower hiring, rising prices, wary consumers: Fed’s beige book points to sluggish economy
Job openings in July fell to the second-lowest level since the pandemic and hiring was weak. Supply managers in the Institute for Supply Management’s survey of factories gave “apocalyptic” descriptions of current conditions, due to uncertainty over tariffs. And the Fed’s beige book survey of current economic conditions was notably weak, with most of the Fed’s district reporting flat growth.
“The data is beginning to look somewhat weaker and should be raising some eyebrows at the Fed,” said Torsten Slok, chief economist at Apollo.
The economy is facing three headwinds — tariffs are creating uncertainty for planning and consumers, immigration restrictions are reducing the labor force, and the restart of consequences for missing student-loan payments has sapped demand, Slok said in an interview on CNBC.
Minneapolis Fed President Neel Kashkari said “the cooling that we are seeing will probably continue,” but said he also wasn’t forecasting a recession.
Two other Fed officials also focused their comments on a slowdown in the labor market, giving less attention to concerns about inflation.
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“Looking ahead, I expect the labor market to gradually cool and remain near full employment with risks tilted to the downside,” said St. Louis Fed President Alberto Musalem.
Atlanta Fed President Raphael Bostic said the labor market is cooling, not collapsing.
“Signs of cooling bear scrutiny, as history tells us that the labor market can turn quickly and decisively,” Bostic said.
He noted former Fed economist Claudia Sahm developed a formula that has proven reliable — when the three-month moving average of the unemployment rate rises by 0.5 percentage points over the rate’s 12-month average, then it keeps rising. Through July, the three-month average is just 0.2 percentage points above the 12-month low.
“That is not a shrieking alarm bell. But this bears watching,” Bostic said.
The realization that the economy is slowing comes before the August jobs report, which is set to be released Friday. July’s weak jobs report and major revisions to previous months’ numbers spurred Trump to fire the head of the Bureau of Labor Statistics.
Economists expect the unemployment rate will pick up to 4.3% in August, which would be the highest since October 2021. Nonfarm payroll is expected to rise a tepid 75,000. Slok said this week’s data suggest Friday’s job numbers might even be a bit weaker than expected.
Traders in derivative markets see the pickup in discussion about a slower economy as implicit confirmation that the central bank will cut interest rates in September. The Fed hasn’t changed rates all year because of worries that inflation might be rekindled by White House tariffs. Fed Chair Jerome Powell opened the door for a rate cut in September in his recent Jackson Hole, Wyo., speech.
Concerns about higher inflation from tariffs hasn’t gone away, but there hasn’t been a smoking gun in the data all summer. On the other hand, worries about a slowing economy are fresh.
Rising prices at the same time as slowing growth is called “stagflation-light.” It is uncertain how much the Fed can trim rates with inflation above the 2% target for four years.
The Fed’s benchmark rate is now in a range of 4.25% to 4.5%. That’s artificially high — designed to keep some pressure on demand so that inflation cools. How much rates were actually putting downward pressure on inflation was a matter of debate, with some officials saying it was barely pushing down prices.
But with growth now obviously slowing, Fed officials seem to be thinking that any downward pressure on demand is too much.
So there is a move to get rates down closer to ”neutral,” which is closer to 3%.
“That suggests that interest rates have some room to come down, gently, over the next couple of years. That’s a reasonable guess. But there are big macro factors like tariffs that we need to watch,” Kashkari concluded.