Fed Faces 'Challenging Situation' Ahead With Labor Market, Inflation, Chair Powell Says

03:21 PM EDT, 09/23/2025 (MT Newswires) -- The Federal Reserve is facing a "challenging situation" ahead with respect to its dual mandate of price stability and maximum employment, Chair Jerome Powell said Tuesday.

Last week, the central bank's Federal Open Market Committee reduced its benchmark lending rate by 25 basis points to a range of 4% to 4.25%, noting increased downside risks to employment and signaling further policy easing later in 2025.

"Near-term risks to inflation are tilted to the upside and risks to employment to the downside -- a challenging situation," Powell said Tuesday in remarks prepared for a speech in Warwick, Rhode Island. "If we ease too aggressively, we could leave the inflation job unfinished and need to reverse course later to fully restore 2% inflation. If we maintain restrictive policy too long, the labor market could soften unnecessarily."

Over the last three months, employers have added an average of 29,000 jobs a month, according to Powell. The labor market has seen a notable slowing in both the supply of and demand for workers, he said, describing it as an "unusual and challenging" situation.

Powell expects tariffs to lead to a one-time increase in prices, likely to be spread over several quarters. "We will make sure that this one-time increase in prices does not become an ongoing inflation problem," he said, adding that uncertainty around the trajectory of prices continues to be high.

The current monetary policy stance remains "modestly restrictive," leaving policymakers well placed to respond to potential economic developments, Powell added.

"The US economy is showing resilience in the midst of substantial changes in trade and immigration policies, as well as in fiscal, regulatory and geopolitical arenas," he said. "These policies are still emerging, and their longer-term implications will take some time to be seen."

Earlier this month, the US Supreme Court agreed to hear the Trump administration's arguments challenging a lower court ruling on tariffs. The US Court of Appeals for the Federal Circuit earlier ruled that most of his tariffs were illegal.

Separately on Tuesday, Fed Vice Chair for Supervision Michelle Bowman said recent data indicate that policymakers are at a "serious risk of already being behind the curve" in addressing a weakening labor market.

"Should these conditions continue, I am concerned that we will need to adjust policy at a faster pace and to a larger degree going forward," Bowman said. "Assuming the economy evolves as I expect, last week's action should be the first step to bring the federal funds rate back to its neutral level."

The odds of the FOMC again cutting interest rates by 25 basis points next month rose to 94% Tuesday from 90% Monday, according to the CME FedWatch tool.

On Monday, newly appointed Fed Governor Stephen Miran said the central bank's policy rate should be two percentage points lower than where it currently is, while St. Louis Fed President Alberto Musalem cautioned against further rate cuts.

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