I am writing this a few weeks before the Federal Open Market Committee's highly anticipated September 17 and 18 meeting. Of course, I cannot and will not predict what action the Committee might take. But I will outline the evolving economic and monetary policy environment as I see it.

And I would like to home in on one particularly timely dynamic: the balancing of my risk outlook as it pertains to the Committee's dual mandate of price stability and maximum employment. I have focused mainly on the price stability side of the mandate since inflation spiked in 2021, as we were clearly further from that goal than from the goal for maximum employment. But as the labor market has cooled in recent months, the balance of risks has shifted, and I am today giving basically equal attention to the maximum employment objective.

The labor market continues to weaken, but it is not weak. The unemployment rate has ticked up this year, yet at 4.3 percent is just a smidge above the Committee's long-run projection of 4.2 percent. Monthly job creation paints a similar picture. The 12-month moving average was a still-healthy 209,000 new jobs a month through July 2024. But that number has steadily declined from a 12-month average of 264,000 in July 2023. (I will note that the Bureau of Labor Statistic has signaled that these growth numbers are likely to be revised downward in the next benchmark revision, in February 2025.)

Another key metric, the number of hires as a percentage of employment, or the hires rate, has retreated to roughly the prepandemic trend. And job openings across the economy remain above levels that prevailed before 2020, but are down substantially from the peaks of 2022.

Given those data, it is not surprising that the once-yawning gap between high labor demand (employed people plus job openings) and lower labor supply (employed plus the unemployed) has gradually narrowed to under 1.5 million in June from more than 5 million in early 2023.

Surveys, anecdotes back up the data

Our Bank's survey results and anecdotes from business leaders back up the statistical narrative of a loosening but still broadly stable labor market. In the Business Inflation Expectations survey, the number of firms that report having job openings declined by about 10 percentage points from June 2023 to June 2024, from 79 to 70 percent. That's a noteworthy move, as that figure held steady at about 80 percent through 2022 and the first half of 2023 before declining later that year and into 2024.

Employers also tell us in direct conversations that they are hiring more cautiously. Some are even seeking to reduce ranks through attrition. Few, though, are contemplating layoffs. In fact, an interesting theme emerged in conversations with business leaders—some fear large layoffs might tarnish their reputation.

Finally, the extraordinarily high wage growth coming out of the pandemic is pulling back to a level more conducive to price stability. Let me be clear: I am all for healthy wage increases for everyone. The problem comes when pay soars so rapidly that it can lead firms to boost prices to cover rising labor costs, especially in the services sector that makes up the bulk of the US economy.

The good news is that for many months now, aggregate wages have outpaced inflation, resulting in real wage growth. But average pay is not rocketing so fast as to threaten price stability. (Economists debate the cause-and-effect between wages and prices—which causes which to rise. In my view, the weight of the evidence suggests that price increases cause wage increases to a greater extent than vice versa. But that's a debate for another time.)

Beyond the labor market, other signals point to broader macroeconomic slowing but do not foretell impending collapse. Even as the gross domestic product numbers remain strong, business leaders tell my staff and me that demand is weakening. And most say they are bracing for further softening.

Rest assured, I do not sense a looming crash or panic among business contacts. However, the data and our grassroots feedback describe an economy and labor market losing momentum.

Inflation declining quickly and broadly

The upside to this is that the slowdown in activity is feeding a continuing, welcome decline in the pace of inflation. The headline rate has fallen by about two thirds since peaking in June 2022. Further, the most recent monthly reports bolster my confidence that inflation is likely on a sustainable path to the Committee's 2 percent objective, measured by the personal consumption expenditures (PCE) price index, the Committee's preferred gauge.

I am especially encouraged by three key signals.

One, the breadth of price increases is narrowing to a range that accords with price stability. That is, the collection of goods and services whose prices are rising rapidly continues to shrink. For the three months through July, 27 percent of prices, weighted by expenditures, rose by more than 5 percent in the PCE price index, compared to the same period a year earlier. That is the lowest share since mid-2021. And the figure for July alone was 18 percent, the lowest level since October 2020 and just above the long-term norm of 17 percent.

Two, core PCE inflation for the three months through July came in at an annualized rate of 1.7 percent. I realize it can seem counterintuitive to closely track an inflation measure that excludes consumer staples like food and energy, as the core reading does. But food and energy prices are particularly volatile and can produce dramatic month-to-month price swings that can distract from a focus on the longer-term, fundamental trend in prices across the economy. Core measures are less susceptible to this and have historically proven to provide a clearer signal of inflation fundamentals.

Three, we have finally begun to see early signs of the long-anticipated slowdown in shelter price increases. Rising costs for housing and related services have buoyed overall inflation for many months. And though many market-based measures of house prices and rental indexes have moderated over the past year—think Zillow and Redfin—the housing component in our official inflation statistics had been stubbornly high. Exactly why the housing components in the PCE price index and consumer price index have reacted unusually slowly to market forces remains something of a mystery. Nevertheless, I'm hopeful that recent moderation in shelter prices will continue.

Let me cite one more promising factor on inflation: inflationary pandemic-era forces, such as supply disruptions and "revenge spending" to satisfy pent-up demand, have greatly diminished.

Reports on prices from our business contacts align with the story the data tell us. Executives in virtually every sector say their ability to increase prices without repelling customers has all but evaporated. In sum, then, after flaring early in 2024, price pressures are diminishing quickly and broadly.

Dual mandate focus seesawing

Let me reiterate that the Federal Open Market Committee has a dual mandate from Congress to strive for price stability and maximum employment. I have been intensely focused on the price stability side of the mandate for the past three-plus years.

That's changing. Given the circumstances before us—eroding pricing power and a cooling labor market—I've rebalanced my focus toward both sides of the dual mandate for the first time since early 2021.

In formulating my monetary policy stance, I always carefully weigh scenarios and take a risk management approach. Right now, I am not quite prepared to declare victory over inflation. Though they have declined significantly, risks to meeting our price stability mandate remain. So, we must stay vigilant to ensure those risks continue to wane. After all, history shouts to us that loosening monetary policy prematurely is a dangerous gambit that can rekindle inflation and entrench it in the economy for many months or even years. In that scenario, the least economically secure among us would suffer most.

At the same time, we must not maintain a restrictive policy stance for too long. I believe we cannot wait until inflation has actually fallen all the way to 2 percent to begin removing restriction because that would risk labor market disruptions that could inflict unnecessary pain and suffering.

Right now, I think we are in a generally favorable position. The labor market is still stable and we're moving ever closer to the Committee's price stability objective. My staff and I aren't celebrating yet. But the outcome that has proven so elusive historically—wringing high inflation out of the economy without provoking severe economic damage—may be within reach. I assure you my colleagues on the Committee and I are doing everything possible to achieve exactly that outcome for the American public.