In an ideal world, the Federal Reserve has kept unemployment low and avoided a recession.
The Fed has switched to Plan B after hopes for such an outcome were dashed.
This year's message from the central bank was simple and stark. In remarks that lasted less than ten minutes, Powell warned that cooling inflation will cause pain for Americans in the form of layoffs, weaker pay growth, and higher borrowing costs. The chair said that the side effects are unfortunate, but that failure to slow price growth and reestablish the economy would mean a lot of pain.
The idea of a soft landing for the US in which the Fed can bring inflation back to 2% without driving up unemployment was laid to rest by the speech. Since the 1980s, the central bank has raised interest rates at a faster pace in an effort to slow inflation. Powell said in the August 26 speech that there would be more rate hikes.
There is a chance of a growth recession. There was a period of slow economic growth and high unemployment. Stagflation requires high inflation and two other conditions. It's a brute-force way to stamp out inflation, and Powell's latest remarks show it's what the Fed is turning to after more than a year of faster than usual price growth.
The chair said that inflation is likely to need a sustained period of below-trend growth.
The labor market has been targeted by the Fed as a key battleground for fighting inflation because of the huge mismatch between worker supply and labor demand. The US still has roughly two job openings for every available worker according to government data published last week.
Softening that pocket of the economy will cause a lot of Americans to be uncomfortable. Companies shift toward protecting profits and cutting costs when interest rates are high. Firms don't have to compete as aggressively to hire because there's less demand.
If too many companies lay off workers, the unemployment rate will go up. The rate is close to the five-decade low seen before the swine flu. At a time when firms are no longer hiring at a rapid pace, Americans could be out of work.
After Powell's speech, Joe Brusuelas, chief economist at consulting firm RSM US, said it would be difficult to get inflation lower without triggering a recession. It's about as close as you can get to a soft landing.
There are clues as to what growth recessions look like in the mid 1980s and mid 1990s. The Fed had to raise interest rates to record highs because of historic inflation. The economy grew at a below-trend pace. The unemployment rate stayed at elevated levels for several years before it started to fall.
The mid-90s economic expansion featured easing inflation, below average growth, and high unemployment. The economic expansions that came after both growth recessions were healthy, but still had some scars from the past.
Friday's employment data showed that the economy is in a phase of slow growth and rising unemployment. The economy added 315,000 new jobs in August, barely beating the median forecast but slowing from the previous month.
The gains in June and July were lower than previously thought. The August trend suggests the months of above-trend growth are coming to a close.
The unemployment rate went up due to an encouraging trend. Labor force participation, which tracks the share of Americans either working or actively seeking work, went up to 62.4% from 62.1% last month. The unemployment rate only counts Americans who aren't working as part of the equation.
The jobs report matches the type of economy the Fed wants to bring in. Job creation will be hampered by higher interest rates as they rise to levels considered restrictive to the economy. Demand for workers will make it harder for Americans to find jobs.
Higher unemployment, cooler inflation, and a period of below-potential growth are some of the consequences of the "softening" Powell spoke of just weeks ago.