Federal Reserve Chair Jerome Powell reaffirmed that the central bank remains on course to cut interest rates at its upcoming meeting, citing a cooling job market despite persistent inflation pressures. He also signaled the Fed may be nearing the end of its three-year effort to passively shrink its $6.6 trillion balance sheet, marking a possible shift toward a more accommodative stance.
Speaking at a conference of the business-economics community in Philadelphia, Powell framed the challenge confronting the Fed as a delicate balancing act:
“Cutting rates too quickly could leave the inflation job unfinished, but moving too slowly to reduce borrowing costs could spur painful losses in the employment market.”
He emphasized that the Fed must navigate between those risks, acknowledging that the outlook for jobs and inflation are pulling in somewhat different directions.
Labor Market Weakness Weighs Heavily
Labor Market Weakness Weighs Heavily
Two especially important signals underlie Powell’s stance:
Slowing Hiring & Employment Fragility
Powell noted that both layoffs and hiring are subdued, and that perceptions of job availability are sliding. With official data delayed by the ongoing government shutdown, the Fed is relying more heavily on alternative private-sector surveys and internal contacts to read the labor market.
He cited “rising downside risks to employment” as one of the reasons the Fed’s assessment of risks is shifting
Persistent Inflation & Tariff Pressures
Inflation remains above the Fed’s 2 percent target, recently hovering around 2.9 percent, in part due to tariffs, which Powell argued are driving a disproportionate share of goods-price increases.
He was cautious not to underplay the inflation risk, warning that if rate cuts proceed too aggressively, the Fed might have to return later to re-tighten. Because of this tension, Powell signaled that the Fed will continue to move meeting by meeting, guided by incoming data.
Nearing the End of Quantitative Tightening
Beyond interest rates, Powell also hinted that the Fed’s three-year campaign to shrink its balance sheet — known as quantitative tightening (QT) — may be nearing its endpoint.
- The Fed’s holdings peaked near $9 trillion in the wake of its pandemic-era asset purchases, and now sit around $6.6 trillion.
- Powell suggested that we may “approach that point in coming months” when the central bank stops passively letting assets roll off without replacement.
- He flagged signs of tightening liquidity in funding markets — such as firmer repo rates — and warned that the Fed will proceed “deliberately cautiously” to avoid repeating past stress in money markets.
- Powell reiterated that the Fed does not intend to return to a pre-COVID balance sheet size (~$4 trillion), but rather will let reserves settle somewhat above what the Fed judges to be a level consistent with “ample reserves.”
Ending or slowing QT would ease constraints on liquidity and possibly allow longer-term rates to soften — supporting further monetary easing.
Market Implications & Expectations
In light of Powell’s remarks:
- Markets have interpreted the tone as dovish. Traders are now pricing in a very high probability (~97%) of a 25 basis point rate cut at the Fed’s meeting later this month.
- Many economists expect two more cuts in 2025, and possibly one in early 2026, contingent on how data evolves.
- Some Fed officials remain cautious. Inflation trends and uncertain data due to the shutdown make signaling future policy tougher.
- The potential end of QT could reduce strain in money markets and help reverse upward pressure on term yields — giving more room for rate cuts to act meaningfully.
Still, Powell’s emphasis on “no risk-free path” underscores the uncertainty: moving too soon or too aggressively could rekindle inflation, while waiting too long risks a sharper slowdown.
Conclusion
Jerome Powell’s remarks Tuesday reflect a Federal Reserve trying to thread a narrow needle: respond to mounting weakness in the labor market without sacrificing inflation control. The suggestion that the Fed may soon pause its balance sheet reduction program complements expectations for additional rate cuts — but the path forward is far from smooth.
As always, the Fed’s next moves will depend heavily on new data — especially employment, inflation, and liquidity conditions — and the degree to which markets tolerate a gradual, cautious pivot.
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