Fed Navigates Two-Sided Risk: Jobs Weakness and Tariff-Driven Inflation

Federal Reserve Chair Jerome Powell's recent comments on the U.S. labor market have sparked speculation that he may have had early access to the September jobs report, even as the data remains delayed due to the ongoing government shutdown. The Federal Reserve's dual mandate of controlling inflation and maximizing employment has grown increasingly complex, with Powell signaling a shift in focus toward employment risks amid a slowing labor market.

The Bureau of Labor Statistics (BLS) typically releases the monthly nonfarm payrolls report on the first Friday of each month, but the September data has been postponed indefinitely. Private-sector indicators, however, suggest a weak labor market. ADP's September report estimated a loss of 32,000 jobs, while Revelio Labs, a new entrant in labor analytics, projected a modest gain of 60,000 jobs. These conflicting signals underscore the uncertainty facing policymakers and marketsWhy wasn't the monthly federal jobs report released? – Deseret …^[3].

In a speech to the National Association of Business Economists, Powell acknowledged the "downside risks to employment have increased," noting that job gains have slowed to an average of 29,000 per month over the summer-a pace below the break-even level needed to stabilize unemploymentSpeech by Chair Powell on the economic outlook^[8]. The unemployment rate, while still relatively low at 4.3% as of August, has edged upward, and Powell emphasized that the labor market's "less dynamic" state could necessitate further rate cuts to support employment.

The Fed's cautious approach is complicated by inflationary pressures stemming from Trump's aggressive tariff policies. The PCE price index, the Fed's preferred inflation gauge, rose 2.7% year-over-year in August, with goods prices driven higher by tariffs. Powell stressed that these inflationary effects are likely temporary but warned that prolonged uncertainty could disrupt corporate profit margins and lead to broader layoffsSlowdown in US Hiring Suggests Economy Still Needs Rate Cuts, …^[7].

The delayed jobs report has heightened scrutiny over the Fed's data-dependent strategy. While Powell declined to speculate on the September data, he reiterated that the central bank is "well positioned to respond" to evolving risks. Markets have priced in two additional rate cuts by year-end, with traders betting on a 75% probability of a 25-basis-point reduction at the November meeting.

Analysts argue that the Fed's balancing act between inflation and employment has become a "textbook example of a soft landing gone sideways." The labor market's weakening, coupled with tariff-driven inflation, has created a "two-sided risk" scenario where aggressive easing could reignite price pressures, while maintaining restrictive policy risks deepening unemployment.

As the government shutdown persists, the Fed faces growing pressure to act preemptively. Powell's remarks suggest the central bank is prepared to prioritize employment risks, but the lack of official data complicates its ability to calibrate policy. With the next scheduled jobs report delayed until after the November election, the Fed's decisions in the coming months could shape both economic outcomes and political narrativesSpeech by Chair Powell on the economic outlook^[8].

---