Powell warns of a ‘very unusual’ economy as tariffs keep goods inflation high amid a weakening labor market

Federal Reserve Chair Jerome Powell called the U.S. economy “very unusual” as the Fed cut rates 25 basis points for a third straight meeting, framing the move as a defensive step to prevent further deterioration in the labor market rather than a confident pivot to easier policy. He said inflation remains elevated largely due to tariff-driven, one-time goods price increases—inflation excluding tariff-affected goods is in the low 2s and goods inflation should peak around Q1 2026 if no new tariffs are imposed—while services inflation and wage pressures are cooling. Powell warned that headline payrolls likely overstate job creation by roughly 60,000 per month (e.g., a reported +40k could be −20k), noted unemployment claims remain low, and highlighted a deep FOMC divide (three formal dissents and six “soft” dissents), leaving the Fed at the high end of neutral and taking a “wait and see” posture amid competing inflation and employment risks.

Analysis

The Federal Reserve cut the policy rate by 25 basis points for the third consecutive meeting and Chair Jerome Powell characterized the move as a defensive step to prevent further weakening in the labor market rather than a confident easing pivot; he said the current stance sits at the "high end" of neutral to allow a "wait and see" approach. Powell described the economy as "very unusual," flagging a rare mix of tariff-driven goods inflation and signs that job creation may already be negative despite headline payrolls, which the Fed estimates overstate monthly job growth by roughly 60,000.

Inflation remains elevated largely because of one-time tariff-related price increases; Powell noted inflation excluding tariff-affected goods is in the low 2% range and projected goods inflation should peak around Q1 2026 if no additional tariffs are imposed. Services inflation and wage pressures are cooling, reducing evidence of economy-wide overheating and weakening the traditional Phillips-curve dynamic.

Policy divisions were pronounced: three formal dissents and six "soft dissents" reflect a split inside the FOMC on weighing persistent inflation risks against a potentially fragile labor market. For investors this increases near-term policy uncertainty—outcomes will hinge on incoming payroll revisions, unemployment claims, tariff developments, and whether goods inflation behaves as projected through early 2026.

Key Decisions for Investors

• Maintain flexibility in duration positioning — consider modestly shorter duration relative to benchmark while preserving liquidity because the Fed is at the high end of neutral and future cuts depend on labor data
• Favor high-quality, low-beta equities and cash-generative businesses until payroll revisions and initial-claims trends confirm labor weakness, as a defensive posture reduces downside risk from a possible growth slowdown
• Monitor tariff policy and goods-inflation releases through Q1 2026 and hedge or underweight companies with high import/tariff exposure, adjusting positions quickly if new tariff rounds or unexpected goods-price persistence emerge