The Fed Strengthens Its Dovish Stance Amid Rising Employment Risks, as Debate Grows Over a “Flexible” Inflation Target

Consensus Builds on Ending Tightening Cycle as Labor Market Weakens
Easing inflation broadens policy flexibility
Momentum grows for a flexible inflation-target framework

The U.S. Federal Reserve (Fed) appears increasingly likely to deliver another interest-rate cut at its October Federal Open Market Committee (FOMC) meeting. Chair Jerome Powell has made clear that the slowdown in hiring poses a greater threat to the economy than inflation, signaling a reinforced dovish tone. With falling oil prices and energy stability easing inflationary pressure, conditions now favor additional rate cuts. At the same time, discussions are gaining traction in Washington about replacing the Fed’s fixed 2% inflation target with a flexible range of 1.75–2.25%, a potential turning point toward a more adaptive monetary framework in response to recession risks.

Signs of Recession Strengthen Amid Decline in New Hiring

On October 14, Federal Reserve Chair Jerome Powell hinted at the possibility of a rate cut, saying at an economics conference in Philadelphia that “there has been little change in the economic outlook since last month’s meeting.” He added, “The Fed is balancing two opposing risks—cutting rates too quickly could mean we fail to achieve price stability, but cutting too late could cause painful losses in the labor market.” Powell’s remarks have been widely interpreted as a concrete signal that the central bank is preparing to lower rates at the October Federal Open Market Committee (FOMC) meeting.

The market now regards an October rate cut as a near certainty. According to Bloomberg data, Fed funds futures are pricing in a 98.6% probability of at least a 25-basis-point reduction, with some institutions seeing a 21.3% chance of a 50-basis-point cut. The Fed already lowered rates by 0.25 percentage points in September and, through its dot plot, indicated the possibility of two additional cuts before year-end.

Powell noted that “there is no longer a risk-free path,” adding that “while inflation is rising moderately, the labor market is showing significant downside risks.” In August, the U.S. unemployment rate climbed to 4.3%, while new hiring fell by 180,000 compared with the previous month. Job openings also declined for the third consecutive month, reinforcing signs of a slowdown. “Both labor demand and supply have clearly weakened,” he said, emphasizing once again that employment risks now outweigh inflation concerns.

Powell also mentioned the possible end of quantitative tightening (QT). “We may reach an appropriate level of reserves within the next few months,” he said, signaling that the Fed’s $6.6 trillion balance-sheet reduction program—ongoing for more than three years—is nearing completion. Since mid-2022, the Fed has reduced total assets from $9 trillion to around $6.6 trillion, maintaining its tightening campaign by halting reinvestments of maturing Treasuries and mortgage-backed securities (MBS).

Energy Stability Supports Rate Cuts and Liquidity Expansion

Easing inflation dynamics are giving the Fed more room to maneuver. As of August, the U.S. core consumer price index (CPI) rose 2.7% year-on-year, still above target but slowing noticeably. Price growth excluding energy and food has moderated as well, setting the stage for a potential rate cut. The main driver is energy price stability: WTI crude has fluctuated between $60 and $70 per barrel, down more than 25% from last year’s peak, while average U.S. gasoline prices have fallen below $3 per gallon.

The Trump administration’s pro–fossil fuel policy remains a key variable behind this stability. President Donald Trump, who championed “Drill, baby, drill” during his campaign, has revived the era of fossil-fuel expansion. Since taking office, he has authorized new offshore and public-land drilling projects and rolled back environmental regulations, reopening many previously halted oil and gas operations. As a result, U.S. crude production has surged to a record 13.24 million barrels per day, strengthening America’s position as the world’s largest oil producer and directly contributing to price stability through increased supply.

However, analysts warn of complex longer-term side effects. While falling energy prices may temporarily ease inflation and boost consumer spending, structural imbalances and environmental risks could intensify over time. Even so, most market participants still view supply growth as a practical buffer against volatility. Stable oil prices, in turn, have given the Fed policy room to expand liquidity during a downturn.

Rethinking Monetary Policy Design for Recession Response

Amid these developments, momentum is growing within the U.S. for a shift away from a fixed 2% inflation target toward a flexible range that allows the Fed to respond more dynamically to recession risks. The argument is that a single-number framework lacks adaptability now that inflation has remained above target while growth slows. Raphael Bostic, president of the Federal Reserve Bank of Atlanta, said in a Macro Musings podcast on the 23rd that “the Fed’s policy framework must remain effective under diverse conditions,” adding that “setting the target range between 1.75% and 2.25% would be a reasonable approach.”

The Fed reviews its monetary-policy framework roughly every five years. At the Jackson Hole Symposium in August, it announced a return to the Flexible Inflation Targeting (FIT) regime, moving away from the Flexible Average Inflation Targeting (FAIT) approach adopted in 2020. Under the FAIT system, the Fed tolerated inflation below target after periods of overshoot. But citing recent overheating, the Fed has reverted to enforcing the 2% target more strictly.

Bostic’s remarks are widely seen as a complementary proposal—introducing a ±0.25 percentage-point range around 2% to reduce policy rigidity. Allowing moderate deviations would enable faster rate adjustments in downturns while preserving credibility. Such flexibility not only enhances responsiveness but may also restore confidence in monetary policy. A fixed target provides clarity but can slow decision-making during economic shocks, whereas a range-based system acknowledges short-term fluctuations while maintaining long-term stability, enabling timely easing actions during recessions.

Still, Bostic cautioned that adopting a range must not be misinterpreted as a signal of premature easing. “Inflation pressures persist, and the Fed must remain vigilant,” he said. He also warned that “the neutral rate may be rising” and that “tariffs and supply-chain costs are feeding into prices with lagged effects.” Taken together, his remarks highlight a pragmatic balance between the Fed’s dual mandates—price stability and maximum employment—underscoring that U.S. monetary policy is entering a gradual transition toward a recession-responsive framework.