PHILADELPHIA, Oct 14 (Reuters) — Federal Reserve Chair Jerome Powell delivered his final public remarks before the central bank’s upcoming policy meeting, addressing an economy experiencing robust growth and a recent uptick in productivity, while simultaneously grappling with policy shifts in trade and immigration that could simultaneously push inflation and unemployment higher.
The situation presents a complex challenge for the Fed, which is tasked with maintaining stable prices and maximizing employment. Officials are also contending with a lack of official economic data due to a U.S. government shutdown, which delayed the release of the September employment report and other key indicators. A consumer price update is now set for October 24, just days before the Fed’s October 28–29 meeting.
Market participants anticipate a 25-basis-point reduction in the Fed’s benchmark interest rate, bringing it to a range of 3.75% to 4.00%, followed by another cut in December.
However, the current economic landscape is marked by contradictory forces, according to EY-Parthenon Chief Economist Gregory Daco. Speaking at the National Association for Business Economics conference where Powell appeared, Daco noted that tariffs and reduced immigration are constraining the economy, while substantial investment in artificial intelligence is providing a counterbalancing boost.
“These dynamics are working against each other—not evenly, and not on the same timeline—but it’s a compelling economic standoff,” Daco said.
The speed at which these opposing trends resolve will be critical for future monetary policy decisions.
Policymakers are split in their outlook: some remain concerned that inflation continues to exceed the Fed’s 2% target and is projected to stay elevated into next year, while others worry the labor market may be entering a period of rapid deterioration.
“Something has to give,” said Fed Governor Christopher Waller in a recent CNBC interview. He pointed to the inconsistency between upward revisions in economic growth—with the Atlanta Fed’s GDPNow model estimating nearly 4% growth in the third quarter—and signs of labor market weakness, including a report from ADP indicating job losses in September.
“You can’t sustain negative employment growth alongside 4% GDP expansion. Either hiring will rebound to match output, or economic growth will slow,” Waller explained. He supports additional rate reductions to safeguard employment but advocates for cautious, quarter-point adjustments to avoid policy errors.
The Fed’s 25-basis-point cut in September was intended to ease potential pressure on the job market while keeping rates sufficiently high to continue exerting downward pressure on inflation.
In the absence of official employment data, officials like Waller are relying on private-sector indicators, which collectively suggest sluggish hiring. However, none of these alternative metrics fully replace the comprehensive data collected by the Bureau of Labor Statistics.
Meanwhile, the most recent unemployment figure, 4.3% in August, remains close to levels associated with full employment. A Chicago Fed estimate suggests the September rate changed little, if at all.
Looking ahead, the effects of various policy changes—including evolving tariffs, immigration restrictions, and tax reforms—will likely become clearer in the coming months.
Corporate surveys, earnings reports, and other indicators suggest businesses are still adapting. Many firms appear to have absorbed tariff-related costs by reducing expenses or accepting lower profits, a trend that may be contributing to short-term productivity gains. However, economists warn that price increases are likely to follow in the coming year as these costs are passed on to consumers.
According to forecasts collected by NABE, inflation measured by the Fed’s preferred gauge is expected to remain at 2.5% through next year. Harvard economist Karen Dynan projects an even steeper rise, forecasting inflation near 3.3% through 2026 as tariff impacts increasingly affect consumer prices.
“Given years of inflation above target, there’s a real risk that inflation expectations become unmoored,” Dynan warned. “If that happens, the rate cuts I expect—several more—could be viewed as a misstep.”
Yet the possibility of a productivity surge driven by AI, capable of boosting growth without fueling inflation, should not be dismissed, said Philadelphia Fed President Anna Paulson at the NABE conference.
She expressed concern that current growth is supported by a narrow set of factors, such as AI investment and spending by higher-income households.
“I don’t want to hinder a productivity boom,” Paulson said, describing the outlook for two additional quarter-point cuts this year as “appropriate.”
“Growth persists, but it’s built on a relatively narrow foundation,” she added. “Some business leaders are already questioning where future demand will originate.”
Reporting by Howard Schneider in Philadelphia; Editing by Dan Burns and Chizu Nomiyama
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Fed’s Powell addresses economy pulled between risks to growth, jobs and prices
PHILADELPHIA, Oct 14 (Reuters) – Federal Reserve Chair Jerome Powell on Tuesday delivers his last scheduled remarks before the Fed ‘s next meeting with the economy enjoying stronger-than-expected growth and a recent jump in productivity, but still adjusting to tariff and immigration policies that economists worry could lead to both higher inflation and higher unemployment. n nChallenging for a central bank responsible for keeping inflation low and employment as high as possible, Powell and his colleagues are also facing a drought of official data amid a U.S. government shutdown that has delayed the September jobs report and other key statistics. An update on consumer prices is now scheduled for October 24, before the Fed ‘s October 28-29 meeting. n nSign up here. n nInvestors expect the Fed to lower its benchmark interest rate by a quarter-of-a-percentage point to the 3.75%-to-4.00% range, and then lower it again in December. n nBut the competing forces in the economy right now have become tangled, said EY-Parthenon Chief Economist Gregory Daco. n n”There are conflicting forces that are affecting the US economy, in particular, with the US economy essentially being constrained by tariffs…Also by reduced immigration,” Daco said at a meeting of the National Association for Business Economics conference, where Powell speaks on Tuesday. “At the same time, we ‘re seeing a great deal of…investment on the AI front… These forces are offsetting one another, not necessarily proportionally, not necessarily at the same time, but I think it ‘s a very interesting duel.” n nHow fast the tension resolves into a more consistent view of the economy will be crucial for coming Fed decisions. n nPolicymakers are divided between those concerned that inflation remains above the Fed ‘s 2% target and is expected to remain so through next year, and those who see the job market at risk of a fast slide. n n”Something ‘s got to give,” Fed Governor Christopher Waller told CNBC last week. He noted the contradiction between economic growth estimates getting revised higher – nearing 4% for the third quarter, according to the Atlanta Fed ‘s GDPNow model – and a job market that seems in the doldrums with a recent report from payroll processor ADP showing the economy lost jobs in September. n n”You can ‘t have negative job growth and 4% GDP growth….Either the labor market rebounds to match the GDP growth, or GDP growth is going to pull back,” said Waller, who favors further rate cuts to protect the job market, but says those should come in cautious, quarter-point moves to avoid a mistake. n nThe Fed ‘s quarter-point reduction in September was framed as a way to balance potential strains on the job market while still leaving rates high enough to maintain downward pressure on inflation. n nIn the absence of the September jobs report, officials like Waller have noted that an array of private-sector indicators have pointed to weak hiring, even if none on their own is a perfect substitute for the Bureau of Labor Statistics ‘ monthly surveys of businesses and households. n nAt the same time, the last reported unemployment rate of 4.3% in August remained near what ‘s considered full employment, and a Chicago Fed estimate of the September rate indicated it did not change much, if at all. n nBut coming months could prove important in understanding the impact of President Donald Trump ‘s policies, from still-evolving tariffs to immigration restrictions to tax changes. n nSurveys of corporate executives, company earnings reports, and other data have painted a consistent picture of an adaptation still underway. Firms may have absorbed much of the tariff impact so far by cutting costs or trimming profits, a dynamic economists said could be driving short-term productivity improvements while the longer-run payoff of AI investment is still developing, but also that price increases are in the pipeline for next year. n nForecasters surveyed by NABE, for example, see inflation by the Fed’s preferred measure remaining at 2.5% through next year, while analysts including Karen Dynan, a Harvard University economist and senior fellow at the Peterson Institute for International Economics, see it rising even higher – in her case to around 3.3% through 2026 as tariff costs are increasingly passed along to consumers. n nGiven recent years of above target inflation, “I think there is a good chance inflation expectations become unanchored…and if that proves to be the case the Fed cuts – and I do expect several more – are going to be seen as a mistake,” she said. n nThe counterargument, of a budding productivity boom that could add to growth without rising prices, can ‘t be discounted, Philadelphia Fed President Anna Paulson told the NABE conference. n nShe said she is already concerned the aspects of the economy supporting growth have narrowed to a few, such as AI investment and spending among higher-income consumers. n n”I don ‘t want to step on a productivity boom,” said Paulson, who described the current outlook for two more quarter-point rate cuts this year as “appropriate.” n nGrowth continues, but rests on “a relatively narrow base,” she said. “Indeed, some business contacts are wondering where future demand will come from.” n nReporting by Howard Schneider in Philadelphia; Editing by Dan Burns and Chizu Nomiyama