By Howard Schneider

WASHINGTON (Reuters) –

Federal Reserve officials gathering at the annual central banking conference in Jackson Hole, Wyoming, this week can take some satisfaction that the U.S. unemployment rate, at 4.3%, remains low by historical standards.

However, this situation has occurred frequently: since the late 1940s, the U.S. unemployment experience often involves rates below the 5.7% long-run average until a rapid rise occurs. This is a concern for Fed officials, who are wary of witnessing a similar phenomenon.

The emerging trend remains unclear.

The steady increase in the unemployment rate from 3.7% in January 2023 to 4.3% as of July 2024 has accompanied an increase of 1.2 million individuals seeking work. This development is typically seen as a positive economic sign, even though it can lead to a higher unemployment rate.

Recently, though, Fed officials have become more explicit about a potential weakening job market, indicating readiness to cut interest rates after maintaining the U.S. central bank’s benchmark policy rate between 5.25%-5.50% for over a year. This level marks the highest in 25 years.

“The balance of risks has shifted, so the debate about potentially cutting rates in September is an appropriate one to have,” stated Minneapolis Fed President Neel Kashkari in a recent Wall Street Journal interview, referring to the central bank’s upcoming Sept. 17-18 policy meeting.

Other Fed officials, including San Francisco Fed President Mary Daly, have expressed increased confidence in inflation returning to the central bank’s 2% target and remain open to rate cuts.

It is widely anticipated that the Fed will lower its policy rate by a quarter of a percentage point next month. Additionally, policymakers will provide updated forecasts about potential future rates and economic conditions through the rest of 2023 and into 2025.

Fed Chair Jerome Powell is expected to clarify that the central bank is poised to start easing credit conditions after addressing the most severe inflation outbreak in 40 years, during his speech at the Kansas City Fed’s Jackson Hole conference on Friday.

EYES ON OTHER MANDATE

Fed policymakers hope these cuts will occur in time to realize a “soft landing” in which inflation decreases without a significant rise in the unemployment rate, which has often accompanied prior central bank efforts to combat inflation through higher interest rates. In previous monetary tightening cycles, a rising unemployment rate tended to continue its upward trajectory.

Conversely, the progress made in combating inflation during this cycle has been notable. The personal consumption expenditures price index, which the Fed utilizes for its 2% inflation target, peaked at an annual rate of 7.1% in June 2022 and fell to 2.5% by July.

Despite this, the unemployment rate had barely changed, staying below 4% for two years, while payroll growth surpassed pre-COVID-19 pandemic averages. This trend shifted this year, prompting Fed officials to reassess the risks of maintaining tight monetary policy for too long.

Recent labor market data highlights these concerns.

The U.S. government reported below-expected job growth in July, with only 114,000 positions added. This result lowered the three-month average below the pre-pandemic trend and increased the unemployment rate by two-tenths of a percentage point to 4.3%.

Additionally, month-to-month data trends indicate challenges, as it appears to take longer for individuals to find jobs, evidenced by the increasing number of people who enter the labor force only to face spells of unemployment.

Furthermore, federal labor flows data reveals a growing number of people transitioning from jobs to unemployment.

Nevertheless, unemployment claims have not significantly surged and have kept pace with labor force growth.

Amid strong consumer spending and positive albeit slowing economic growth, the Fed does not view the job market as a crisis; it simply aims to prevent one.

In comments to the Financial Times, Daly remarked that maintaining high rates while inflation decreases could lead to an unstable labor market. Chicago Fed President Austan Goolsbee echoed this sentiment, warning that prolonged tight policy could adversely affect employment, which is also crucial to the Fed’s mandate.