Powell Walks Tightrope: Jobs Slow, Tariffs Threaten as Fed Cuts Rates

The U.S. Federal Reserve faces a complex economic landscape as it grapples with the implications of shifting labor market dynamics and inflationary pressures. In a speech delivered on August 22, 2025, Federal Reserve Chair Jerome Powell highlighted growing concerns over employment stability, noting a marked slowdown in payroll job growth. Over the past three months, job creation averaged only 35,000 per month, a sharp decline from the 168,000 monthly average in 2024. This slowdown, exacerbated by downward revisions to earlier employment data, has raised the specter of rising unemployment risks, particularly given the historically low 4.2% unemployment rate as of July 2025.

The Federal Open Market Committee (FOMC) has responded to these developments by implementing its first rate cut of 2025, reducing the target range for the federal funds rate by 25 basis points to 4.00–4.25%. This decision followed a meeting where all 12 members voted in favor of the cut, with one dissenting vote for a larger 50-basis-point reduction. The rate cut is seen as a precautionary measure to support the labor market amid evolving economic uncertainties, including the Trump administration’s imposition of higher tariffs, which Powell warned could further drive up prices and slow growth.

While the labor market remains in a “curious kind of balance,” with both supply and demand for workers slowing sharply, Powell emphasized that downside risks to employment are on the rise. Layoffs remain minimal, and wage growth, while moderating, continues to outpace inflation. However, the labor force participation rate has edged down, partly due to a significant slowdown in immigration. The reduced rate of labor force growth has sharply lowered the breakeven rate of job creation needed to keep the unemployment rate stable, making the labor market more vulnerable to sudden shocks.

Inflationary pressures, although easing compared to post-pandemic levels, remain above the Fed’s 2% target. As of March 2025, total PCE prices had risen 2.3% over the past 12 months, with core PCE prices up 2.6%. Tariffs, in particular, have started to exert upward pressure on consumer prices, with estimates suggesting their effects will continue to accumulate through 2026. Powell acknowledged the potential for tariffs to trigger a more persistent inflation dynamic, though he emphasized that the labor market’s current softness and the stability of long-term inflation expectations provide a buffer against such risks.

The Fed’s dual mandate of maximum employment and price stability is now in a delicate balance, with upside risks to inflation and downside risks to employment both present. In response, the Fed has shifted its policy stance, lowering the federal funds rate by 100 basis points since the previous year to bring it closer to a neutral position. This adjustment, however, does not signal a definitive easing of policy but rather a cautious recalibration in light of evolving economic conditions.

The economic projections released by the FOMC in conjunction with the rate cut reflect a slightly more optimistic outlook for growth compared to earlier forecasts. The Fed now anticipates real GDP growth of 1.6% in 2025, 1.8% in 2026, and 1.9% in 2027. The median unemployment rate is expected to remain at 4.5% in 2025 before gradually declining to 4.3% in 2027. These projections underscore the Fed’s commitment to fostering a labor market that supports maximum employment, even as it remains vigilant against inflationary pressures.

In his speech, Powell also outlined broader considerations for the evolution of the Fed’s monetary policy framework. The revised Statement on Longer-Run Goals and Monetary Policy Strategy reaffirms the Fed’s commitment to price stability and maximum employment, while moving away from a “makeup” strategy that had been part of the 2020 framework. The updated approach emphasizes flexibility and responsiveness to a wide range of economic conditions, acknowledging that the 2020 framework’s focus on the effective lower bound had led to communication challenges.

With global labor markets also showing signs of divergence, the U.S. context is part of a broader trend where low unemployment coexists with uneven wage growth and participation rates. In the OECD, unemployment has remained stable at 4.9%, while countries like Brazil and Japan report contrasting outcomes in wage inflation and labor force participation. These global dynamics further complicate the Fed’s efforts to navigate the domestic economy, as international trade policies, technological disruptions, and demographic shifts continue to reshape labor markets.

As Powell concluded his remarks, he reiterated the Fed’s independence and its commitment to data-driven decision-making, even as external pressures, including political calls for more aggressive rate cuts, mount. The Fed’s cautious approach reflects its recognition of the delicate balancing act required to address both employment and inflation concerns, with the ultimate goal of maintaining long-term economic stability.