Chair Powell’s comments at the press conference for the latest FOMC meeting highlight one of the biggest challenges for the Fed (and financial market participants) at the moment—deciding how much of the slowdown in the labor market is due to a shortage in the supply of workers and how much is due to softening demand. The answer to this has important, and potentially quite different, implications for monetary policy.
In this Economics Weekly, Richard de Chazal discusses the evidence for each of these cases, with the view that it is likely a combination of both, requiring the removal of policy restrictiveness but little in the way of stimulus.
So you do not see a weakening in the labor market. You do see a slowing in job creation, but also a slowing in the supply of workers. So you’ve got a labor market that’s in balance, albeit partially because both demand and supply for workers is coming down at the same pace, and that’s why the unemployment rate has remained roughly, roughly stable, which is why I said there—we do see downside risk in the labor market…. You know, the, the main number you have to look at now is the unemployment rate, because if it’s true that the demand for workers in the form of, let’s call it payroll jobs, that number has come down, but so has the breakeven number, kind of in tandem. So, you know, as long as that puts the labor market in, in balance. The fact that it’s getting into balance due to declines in both supply and demand, though, I think is suggestive of downside risk….
You’ve got a very low unemployment rate, and it’s kind of been there for a year as job creation has moved down, but also we know that because of immigration policy really, the flow into our labor forces is just a great deal slower. And those two things have slowed more or less in tandem. If you look at things, like I mentioned, quits, look at wages— wages are gradually cooling—look at vacancies to unemployment, those things have been pretty stable, they haven’t really moved a lot in a full year. So I think if you take the totality of the labor market data, you’ve got a solid labor market. But I think you have to see that there are downside risks.
–Fed Chair Powell, 30 July 2025