Mr. Powell, in a speech Wednesday, said an overheated labor market needed to cool more for the Fed to be confident that inflation would make durable downward progress toward its 2% goal.
Because the Fed has raised rates rapidly and it takes time for those moves to influence the economy, it would make sense for officials to slow rate increases, he said at an event at the Brookings Institution. “The time for moderating the pace of rate increases may come as soon as the December meeting,” he said.
“The labor market … shows only tentative signs of rebalancing, and wage growth remains well above levels that would be consistent with 2% inflation,” Mr. Powell said. “Despite some promising developments, we have a long way to go in restoring price stability.”
He focused part of his remarks on exploring why the share of Americans seeking work remains below its prepandemic level. The analysis carries important implications for the setting of interest rates because if wage pressures remain stronger in the coming years, that could lead to a period of greater volatility in wages, inflation and interest rates.
Mr. Powell said most of the shortfall appears to reflect older Americans who retired early when the pandemic hit the U.S. in March 2020—and from slower growth in the working-age population, which he said could reflect reduced levels of legal immigration and a surge in deaths during the pandemic.
teps to boost workforce participation aren’t controlled by the Fed and wouldn’t be able to take effect rapidly enough to address the current bout of inflation, Mr. Powell said.
The upshot is that Fed policy will seek to slow inflation and wage growth by reducing demand for workers, a subject that Mr. Powell addressed delicately on Wednesday. “For the near term, a moderation of labor demand growth will be required to restore balance to the labor market,” he said.
While strong wage growth “is a good thing,” he implied it is too high right now to support a return to the 2% inflation rate the Fed targets. “For wage growth to be sustainable, it needs to be consistent with 2% inflation,” he said.
Jerome Powell Signals Fed Prepared to Slow Rate-Rise Pace in December