When the Federal Reserve began lowering interest rates in September, inflation was cooling and the job market was showing some troubling signs of weakness.
Three months and a full percentage point of rate cuts later, the opposite is true: The job market seems to have stabilized, but progress on inflation has stalled.
As a result, the central bank is widely expected to pause its campaign of rate cuts at its meeting this month, a message reinforced by Fed officials in a series of speeches this week.
“While it is not my baseline outlook, I cannot rule out the risk that progress on inflation could continue to stall,” Michelle Bowman, a Fed governor, said in a speech on Thursday.
Ms. Bowman, the only Fed official to oppose the central bank’s half-point rate cut in September, voted in favor of last month’s more traditional quarter-point reduction. But in her speech, she said she “could have supported” keeping rates steady in December and hinted that she would be unlikely to support a cut in January unless economic conditions changed significantly before that meeting at the end of the month.
“In light of these considerations, I continue to prefer a cautious and gradual approach to adjusting policy,” Ms. Bowman said.
The Fed can afford to be cautious because the job market has remained strong. After a scare over the summer, the unemployment rate has stabilized, job growth has rebounded and layoffs have remained low. That is giving policymakers confidence that they can keep rates at about 4.4 percent without running an imminent risk of causing a sharper economic slowdown.
“The strength of the economy allows us to be patient,” Jeff Schmid, president of the Federal Reserve Bank of Kansas City, said in a speech on Thursday. Mr. Schmid will become a voting member of the Fed’s policy-setting Open Market Committee at its January meeting.
The bigger question is what happens if the economy, and in particular the labor market, weakens while inflation remains stubborn.
“The labor market is now in rough balance,” said Mary Daly, president of the Federal Reserve Bank of San Francisco, in a panel discussion on Saturday. “At this point, I would not want to see further slowing in the labor market.”
There have been some hints in recent months that the labor market is softening, even as the unemployment rate has remained low. Hiring has continued to weaken, and it is taking longer for unemployed workers to find jobs. If those trends become more pronounced, policymakers may decide they need to cut rates further, said Nancy Vanden Houten, senior economist at Oxford Economics.
“If hiring should slow more or layoffs were to increase a little bit, I think the picture could start to shift,” she said.
Fed officials will watch Friday’s employment data carefully for signs of further weakness. But they have signaled that it will take more than one weak report to convince them that the labor market is deteriorating.
Ms. Bowman said on Thursday that rapidly shifting trends in immigration, along with other factors, had made the monthly jobs numbers harder to interpret, which she said should make policymakers more cautious.
And Susan Collins, president of the Federal Reserve Bank of Boston — who, like Mr. Schmid, will have a vote on policy decisions this year — warned in a speech on Thursday against “overreacting to individual data readings” and said her “concerns about emerging labor market fragility have decreased.”