Federal Reserve Chair Jerome Powell recently underscored the central bank’s commitment to potential interest rate cuts in 2025, emphasizing the delicate balance between managing inflation and supporting a softening labor market. His remarks highlight the Fed’s “no risk-free path” policy approach, complicated by ongoing government shutdown data gaps and external pressures like tariffs. Investors should prepare for continued strategic adjustments as the Fed navigates this complex economic landscape.
In his latest public address, Federal Reserve Chair Jerome Powell strongly indicated that the central bank remains poised to implement further interest rate cuts in the coming year, potentially twice more in 2025 and once in 2026. Speaking at an event hosted by the National Association for Business Economics in Philadelphia, Powell articulated the challenging dilemma facing the Fed: fostering maximum employment while maintaining stable prices amidst a backdrop of weakening labor market signals and persistent inflationary pressures from tariffs.
This commitment follows the Fed’s initial rate reduction in September 2025, signaling a proactive stance to support economic activity. However, Powell’s statements underscore a cautious approach, acknowledging that there is “no risk-free path for policy” as the Fed balances its dual mandate.
The Persistent Tension Between Jobs and Inflation
Powell’s address reiterated a crucial message: the outlook for employment and inflation “does not appear to have changed much” since the September meeting, despite the lack of official government data due to the ongoing shutdown. This stability in outlook, however, belies underlying tensions.
Softening Labor Market Concerns
While the unemployment rate remained low through August, Powell highlighted a sharp slowdown in payroll gains, partly attributing it to a decline in labor force growth stemming from lower immigration and participation. He stressed that “downside risks to employment appear to have risen” in this “less dynamic and somewhat softer labor market.” Evidence suggests both layoffs and hiring remain low, with households’ and firms’ perceptions of job availability and hiring difficulty continuing their downward trends. For instance, private U.S. employers reportedly shed 32,000 jobs in September, according to ADP’s National Employment Report, a key alternative data source during the shutdown.
Inflationary Pressures and Tariff Impacts
On the inflation front, Powell noted that tariffs have elevated the Fed’s preferred measure of inflation, the 12-month core PCE inflation, to 2.9% in August, as reported by the Bureau of Economic Analysis. However, he clarified that outside these duties, there are no “broader inflationary pressures” that would keep prices high. Small businesses, according to a survey from the National Federation of Independent Business (NFIB), have indicated plans for price hikes, signaling that tariff-induced price increases may be slowly passed on to consumers. The Fed faces a difficult tightrope walk, as tariffs can both raise consumer prices and slow economic growth, presenting a complex challenge to its policy objectives.
Navigating the Data Drought: The Government Shutdown’s Impact
The federal government shutdown has significantly complicated the Fed’s data-driven approach to policymaking by suspending the release of most official economic statistics. Powell acknowledged this, stating, “from our standpoint, we’ll start to miss that data, and particularly the October data, if this goes on for a while…it could become more challenging.”
To mitigate this, the Fed is relying on a “wide variety of public- and private-sector data” and insights from its nationwide network of contacts through the reserve banks. While these alternative data sources, such as state-level unemployment claims and the ADP report, are valuable supplements, Powell cautioned they are not as effective as the “gold standard” of governmental data.
The Future of the Fed’s Balance Sheet
Beyond interest rates, Powell hinted at another significant monetary policy shift: the potential cessation of the Fed’s balance sheet reduction, also known as quantitative tightening (QT), in the coming months. The Fed has been gradually shrinking its roughly $6.6 trillion balance sheet since 2022, reversing asset purchases made during the pandemic to stimulate the economy. This process involves allowing treasuries and mortgage-backed securities to mature without reinvesting the proceeds.
Powell stated, “Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions.” The committee aims to avoid money market strains similar to those experienced in September 2019, often referred to as a “taper tantrum.”
Defending Past Quantitative Easing
During his speech, Powell also took time to defend the Fed’s past practice of buying longer-term treasury bonds and mortgage-backed securities in 2020 and 2021. These actions, intended to lower long-term interest rates and support the economy during the pandemic, have faced criticism from figures like Treasury Secretary Scott Bessent, who argued they worsened inequality and were maintained for too long as inflation began to spike.
Powell acknowledged, “with the clarity of hindsight, we could have — and perhaps should have — stopped asset purchases sooner.” However, he asserted that “our real-time decisions were intended to serve as insurance against downside risk,” and were crucial in preventing a breakdown in the treasury securities market that could have sent interest rates much higher.
Investment Implications and Forward Look
For investors, Powell’s statements signal a Fed that is actively managing economic risks with a bias toward accommodative policy, albeit cautiously. The prospect of further rate cuts could reduce borrowing costs for mortgages, car loans, and business loans, potentially stimulating economic activity. However, the uncertainties surrounding labor market health, tariff-driven inflation, and the impact of the government shutdown on data present a complex environment.
The impending decision on the balance sheet runoff will also be critical, influencing longer-term treasury interest rates and overall market liquidity. Investors should closely monitor the Federal Open Market Committee’s (FOMC) upcoming meeting on October 28-29, where these policy considerations will be at the forefront.
As Powell noted, “We will set policy based on the evolution of the economic outlook and the balance of risks, rather than following a predetermined path.” This adaptive approach means continuous vigilance and informed analysis will be paramount for navigating the markets in the coming months.
