Inflation remains high, the labor market weakens: Fed changes policy direction

GateUser-a5fa8bd0 · 2026-01-12T08:53:26+00:00

Powell's recent statements indicate a shift in focus from potential rate hikes to monitoring job market risks and persistent inflation issues. Job growth has slowed, with unemployment around 4.4%, reflecting weakening demand for workers. Inflation in goods has risen due to tariffs, while services stabilize. The Fed has lowered rates by 25 basis points and resumed short-term bond purchases, aiming for balanced policy amid evolving economic conditions.

GateUser-a5fa8bd0

2026-01-12 08:53:26

Abstract generation in progress

Recent statements by Powell clearly signal a shift in narrative — while not long ago the market speculated about further interest rate hikes, today the focus has completely shifted to monitoring labor market risks and persistent price issues. The new inflation calculator shows that core PCE remains at 2.8% year-over-year, well above the Fed’s 2% target.

Labor Market Loses Momentum

Employment has slowed down, with unemployment reaching around 4.4%, marking a clear cooling compared to previous growth periods. Businesses are hiring less aggressively, and economic expectations regarding employment prospects are noticeably declining. Powell noted that both the pace of hiring and the number of layoffs have decreased, suggesting the market is settling into a less dynamic level. Part of the slowdown is due to structural factors — fewer immigrants and lower labor force participation — but weakening demand from firms for new workers also plays a role.

Goods Inflation Driven by Tariffs, Services Stabilizing

Inflation in the goods sector has increased primarily due to higher tariffs, but the services sector shows a positive downward trend. Despite a spectacular decline from the peak in 2022, the current price level does not give the Fed enough comfort to fully ease policy.

Fed Cuts Rates by 25 bps and Resumes Bond Purchases

The FOMC decided to cut interest rates by 25 basis points and simultaneously resumed short-term Treasury bond purchases. The goal is to maintain adequate reserves in the system and ensure the smooth functioning of monetary policy transmission. Powell emphasized that in the face of rising employment risks and stubborn inflation, “there is no safety” — every decision requires precise balance within the dual mandate.

No Pre-Determined Path

Interest rates are already near what is considered a neutral level for the economy. Future moves will not follow a predetermined path but will depend on current economic data and assessments of evolving risks. This means the Fed maintains full flexibility to respond to changing conditions in the labor market and prices.

View Original

This page may contain third-party content, which is provided for information purposes only (not representations/warranties) and should not be considered as an endorsement of its views by Gate, nor as financial or professional advice. See Disclaimer for details.