When the Federal Reserve meets this month, it is likely to begin lowering interest rates after a long pause. But the level of support for cutting and the size of the reduction will depend in large part on Friday’s jobs report.
Officials have been locked in an intense debate over the trajectory for interest rates amid mixed economic signals. Monthly jobs growth has sharply slowed alongside business activity, but the unemployment rate has stayed stable and layoffs remain low. Meanwhile, price pressures tied to tariffs have elevated inflation.
That has created a conundrum for the Fed. Policymakers do not want to wait too long to lower interest rates for fear of causing undue harm to the labor market. But they also do not want to provide relief prematurely and risk allowing inflation to intensify. Rates are now set in a range of 4.25 to 4.5 percent.
Jerome H. Powell, the Fed chair, sought to find some middle ground in a speech late last month, sending his strongest signal yet that rate cuts were coming. Still, he made clear that officials would proceed slowly with those reductions.
“The balance of risks appears to be shifting,” Mr. Powell said in his final speech as Fed chair at an annual conference hosted by the Reserve Bank of Kansas City in Jackson, Wyo. With borrowing costs weighing on the economy, the labor market softening and inflationary pressures more contained than initially feared, “the shifting balance of risks may warrant adjusting our policy stance,” he said.
Mr. Powell stressed that the labor market was in a “curious kind of balance,” with demand for new hires slowing but also the supply of available workers contracting as a result of President Trump’s immigration restrictions.
“This unusual situation suggests that downside risks to employment are rising,” he said. “And if those risks materialize, they can do so quickly in the form of sharply higher layoffs and rising unemployment.”
Since Mr. Powell delivered that speech, several Fed officials have appeared to embrace lowering interest rates in the near future. Another month of subdued monthly jobs growth — especially if it is coupled with a rise in the unemployment rate — would make the case even more clear-cut.
A substantially weaker report may even prompt Fed officials who have been pushing for the central bank to lower interest rates to back a bigger-than-usual move. The Fed typically lowers borrowing costs in quarter-point increments.
Christopher J. Waller, one of two Fed governors who wanted to cut interest rates in July, recently backed a quarter-point cut in September. But he also suggested that he could support something more aggressive if August’s data “points to a substantially weakening economy and inflation remains well contained.”
Mr. Waller, who is seen as a contender to replace Mr. Powell when his term as chair ends in May, was one of two officials to dissent from the Fed’s decision in July to hold interest rates steady. At the time, he warned his colleagues against waiting for the labor market to deteriorate before taking action.
“While there are signs of a weakening labor market, I worry that conditions could deteriorate further and quite rapidly,” he said in his recent remarks. He added that he thought it was important that the Fed “not wait until such a deterioration is underway and risk falling behind the curve in setting appropriate monetary policy.”
Colby Smith covers the Federal Reserve and the U.S. economy for The Times.
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