Fed Guarded on the Outlook for Employment

In the short run, Fed policy is driven by the US labor market more than inflation. The data (Figure 1) illustrates that changes in the US unemployment rate and changes in Fed policy rates are generally in lock step.  After moving a bit out of sync around the pandemic, this relationship is normalizing.

We do not see a rapid collapse in employment.  Neither does Chairman Powell.  At the same time, the Fed is guarded because labor markets often weaken quickly once a slowdown is entrenched.  At the moment,  the unemployment rate is rising modestly, suggesting the Fed cut further over time.