Labor Econ Perspective on the Fed (January Meeting)
Subtle changes to the statement acknowledge reality
As a labor econ guy I have to think about what the Fed does because it affects labor markets! So this isn’t a Fed expert opinion - think of it me as an informed dilettante.
1. Acknowledging the Data / No Longer “Making Progress”
If you reflect on how the data has evolved in recent months, two mandate-relevant things have happened: the labor market has deteriorated more slowly (across most dimensions) than the Fed worried about when it started cutting rates, and inflation has stopped cooling.
We already saw this showing up in December 2024 with that Fed meeting’s associated Statement of Economic Projections: slightly lower near term unemployment, slightly higher inflation, and a slower pace of easing.
And in today’s statement, we saw associated changes in the language. Unemployment “has stabilized” (instead of “has moved up”) and inflation no longer merits the moniker “has made progress” (presumably because it has stopped falling, at least for the time being).
Powell was asked at the press conference about the significance of the change in language and downplayed it. Make of that what you will! But here’s a super-boring common sense scenario analysis:
If unemployment doesn’t go up and inflation remains stuck at just below 3%, the Fed might not ease at all this year.
If inflation falls a little and the unemployment rate goes up only a little more, we’ll get a small amount of easing. (In which case “making progress” may return to the statement or at least Powell’s oratory.)
It would take a non-trivial further deterioration in the unemployment rate, or a vigorous convergence toward 2% inflation, to bring additional rate cuts (beyond what is expected in the SEP) back into the picture.
2. The Messiness of Unpredictable Policy
Powell got a ton of questions about the new administration. I won’t recap those, but worth observing an important theme: it’s really hard to forecast right now. There are a lot of ideas floating around, some of which will boost inflation and/or labor markets; others which might cool them. (I struggled with analyzing possible labor market impacts in my 2025 outlook, and ended up mostly on the heating side.)
I am guessing the Fed will end up being really laggy and un-anticipatory until there are signs of concrete implementation (at which point the guesswork becomes more about modeling impact).