WASHINGTON — Federal Reserve Chair Jerome Powell suggested Tuesday that the central bank’s long‑running balance sheet reduction program could soon come to an end, a signal that policymakers are preparing to shift toward a more accommodative stance as the U.S. economy shows signs of strain. Speaking at an economics conference in Philadelphia, Powell acknowledged that the labor market is softening and that the risks of keeping policy too tight may now outweigh the dangers of easing too soon.
The remarks, delivered less than two weeks before the Federal Open Market Committee’s next meeting, were widely interpreted as opening the door to additional interest rate cuts before year‑end. Investors responded swiftly, with Treasury yields falling and equity markets rallying on expectations that the Fed is preparing to pivot from its aggressive tightening campaign of the past three years.
A Shift in Tone
Powell’s comments marked a notable shift from the cautious language he had used in recent months. While the Fed cut rates by a quarter point in September — its first reduction of 2025 — Powell had previously emphasized patience, warning that inflation remained above the central bank’s 2 percent target. On Tuesday, however, he acknowledged that the balance of risks has changed.
“The labor market has demonstrated pretty significant downside risks,” Powell said, noting that both the supply and demand for workers have “declined quite sharply.” He added that the Fed is “nearing a point” where it will stop reducing the size of its bond holdings, a process known as quantitative tightening, or QT. Since 2022, the Fed has allowed hundreds of billions of dollars in Treasury and mortgage‑backed securities to roll off its balance sheet, shrinking its holdings from nearly $9 trillion at the height of the pandemic to just over $7 trillion today.
Markets took the remarks as confirmation that QT is in its final stages and that rate cuts are likely to follow. Futures trading on Wednesday showed investors pricing in a strong probability of another 25‑basis‑point cut at the Fed’s October 28–29 meeting, with some analysts predicting as many as two more reductions before the end of the year.
Economic Pressures Mount
The shift comes amid growing evidence that the U.S. economy is losing momentum. Job growth has slowed sharply in recent months, with September’s payroll report showing the weakest gains since early 2021. Wage growth has also cooled, and job openings have declined, suggesting that the once‑red‑hot labor market is finally coming back into balance.
At the same time, consumer spending has softened, weighed down by higher borrowing costs and fading pandemic‑era savings. Retail sales data released last week showed a surprise decline, while surveys of consumer confidence have fallen to their lowest levels in more than a year. Business investment has also weakened, with companies citing uncertainty about trade policy and global demand.
Inflation, meanwhile, has continued to ease. The Fed’s preferred measure, the personal consumption expenditures price index, rose 2.6 percent in August from a year earlier, down from a peak of more than 7 percent in 2022. Core inflation, which excludes food and energy, has also moderated, though it remains slightly above target.
“The Fed is increasingly confident that inflation is on a sustainable path back to 2 percent,” said Michael Feroli, chief U.S. economist at JPMorgan. “That gives them room to focus more on supporting growth and the labor market, which are clearly under pressure.”
Market Reaction and Political Context
Financial markets welcomed Powell’s dovish tone. The S&P 500 jumped nearly 2 percent on Tuesday, while the Nasdaq Composite gained more than 2.5 percent, led by interest‑rate‑sensitive technology stocks. The yield on the 10‑year Treasury note fell to 3.95 percent, its lowest level since June, as investors bet on further easing.
The political backdrop adds another layer of complexity. President Donald Trump has repeatedly called on the Fed to cut rates more aggressively, arguing that high borrowing costs are stifling growth. Powell has insisted that the central bank remains independent and that its decisions are guided by economic data, not political pressure. Still, the timing of his remarks — just weeks before the Fed’s next meeting and amid heightened scrutiny from the White House — has fueled speculation about how much room the central bank has to maneuver.
“Powell is trying to strike a delicate balance,” said Diane Swonk, chief economist at KPMG. “He wants to reassure markets that the Fed is responsive to economic risks, but he also needs to preserve the perception of independence. That’s a tough needle to thread in this environment.”
Looking Ahead
The key question now is how quickly the Fed will move. Some analysts argue that the central bank should cut rates aggressively to prevent a deeper slowdown, while others caution that moving too fast could reignite inflation. The Fed’s updated economic projections, due at the October meeting, will provide important clues about policymakers’ intentions.
For households and businesses, the prospect of lower rates offers some relief. Mortgage rates, which surged above 7 percent earlier this year, have already begun to edge lower, and credit card rates could follow. For companies, cheaper borrowing costs may encourage investment and hiring.
But risks remain. Global growth is slowing, with Europe grappling with energy shocks and China facing a prolonged property slump. Geopolitical tensions, from the Middle East to East Asia, add further uncertainty. And while inflation has eased, it could flare up again if supply shocks re‑emerge.
“The Fed is not declaring victory,” Powell cautioned. “We are simply acknowledging that the risks are more balanced than they were a year ago. Our commitment to price stability remains unwavering, but we also recognize the importance of sustaining the expansion and supporting the labor market.”
As the Fed prepares for its late‑October meeting, investors will be watching closely for signs of how far and how fast the central bank is prepared to go. For now, Powell’s message is clear: the era of relentless tightening is drawing to a close, and the door to rate cuts is open.
Reporting by Nick Ravenshade. Original analysis by NENC Media Group.
Sources: CNBC, Reuters, Investing.com, EconoTimes, Morningstar, CBS News.
Photo: Joshua Hoehne / Unsplash
Comments ()