by Howard Schneider

WASHINGTON (Reuters) – Federal Reserve officials gathered this week at their annual symposium in Jackson Hole, Wyoming, may take credit for the fact that U.S. unemployment remains low by historical standards at 4.3 percent.

Yet this is often the case: since the end of the 1940s, the unemployment rate has been mostly below its historical average of 5.7%, with the exception of episodes during which this rate rises rapidly and well beyond this trend.

The Fed fears that this phenomenon will repeat itself, especially since the trend is not clear.

In fact, the rise in unemployment since January 2023, when it reached 3.7%, has been accompanied by an increase of 1.2 million in the number of people looking for work. Such a trend is often considered positive for the economy, although it can support the unemployment rate.

In recent days, U.S. monetary policymakers have appeared increasingly concerned about weakening labor markets, and are preparing to cut rates that have been held for more than a year to their highest level in 25 years.

“The balance of risks has shifted, and it has become relevant to discuss a rate cut in September,” Minneapolis Fed President Neel Kashkari said in an interview with The Wall Street Journal.

Other policymakers, including San Francisco Fed President Mary Daly, have said in interviews that they are increasingly confident that inflation is returning to target and are supportive of a rate cut.

Most observers believe that the Fed will cut rates by 25 basis points at its meeting on September 17-18. This meeting will be accompanied by an update of the “dot plot”, the rate forecasts of the members of the Monetary Policy Committee, and the economic projections of the central bank until 2025 inclusive.

Fed Chairman Jerome Powell is expected to provide more details on the September meeting at a conference scheduled for Friday at the Jackson Hole symposium.

DOUBLE MANDATE

Monetary policymakers hope the cuts will help achieve a “soft landing” – an economic environment defined by inflation returning to target without a sharp rise in unemployment – as most rate hike cycles have soured labor markets. Past monetary cycles show that unemployment keeps rising once it starts to rise.

Conversely, the current cycle has been marked by an impressive slowdown in inflation, with the increase in the PCE price index falling from 7.1% over one year in June 2022 to 2.5% in July 2024, close to its target of 2%.

The unemployment rate, however, has barely budged, remaining below 4% for two years, while the number of new jobs has been well above its 10-year average.

The trend is beginning to reverse and monetary policymakers are beginning to place greater emphasis on this aspect of their dual mandate.

In July, the number of new jobs was weaker than expected, at 114,000, pushing the three-month trend below its pre-pandemic levels and causing the unemployment rate to rebound by 0.2 percentage points, to 4.3%.

Other indicators are worrying: while the number of active people continues to increase, the time needed to find a job is also increasing.

However, new unemployment registrations have increased at the same rate as the growth in the number of active people.

With household consumption remaining high and growth slowing but still positive, the Fed does not believe it is facing a jobs crisis but the central bank wants to avoid triggering one.

In comments to the Financial Times on Sunday, Mary Daly said that keeping rates high despite falling inflation was “ensuring that we get the outcomes we want to avoid, which are stable prices and an unstable and weakened jobs market.”

Chicago Fed President Austan Goolsbee echoed that analysis Sunday on CBS television: “If rates are kept tight for too long, there will be a problem with the Fed’s full employment mandate.”

(Reporting Howard Schneider, Corentin Chappron, editing by Kate Entringer)

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