Powell’s Latest Speech: Fed May Pause Balance Sheet Reduction as Labor Market Weakens

Powell: No Policy Path Is Without Risk

Just before the Federal Reserve’s pre-meeting blackout period, Chairman Jerome Powell delivered his final public remarks of the month at the National Association for Business Economics (NABE). He noted that the U.S. labor market is clearly cooling off, while the inflation outlook shows little sign of improvement. Even with some economic data updates limited by the government shutdown, Powell indicated that rate reductions remain a consideration.

Powell emphasized that the current economic landscape presents “no risk-free policy path.” Cutting rates too soon could reignite inflation, but moving too slowly risks deeper fallout from a weakening labor market. His comments led markets to interpret that the Fed may take a more dovish stance on monetary policy in upcoming meetings.

Unemployment Rate Likely to Rise Further

Powell repeatedly highlighted that hiring in the U.S. is slowing, job openings are declining, and both labor supply and demand are weakening. He pointed out that while unemployment is still low, this stability does not reflect robust growth—it may actually signal weakening momentum in employment.

“In a somewhat softer labor market, the downside risks to employment are rising,” Powell stated, noting this was one reason the Fed chose to cut rates in September. He stressed that the Fed’s goal is to balance its dual mandate—maximum employment and price stability—but “the current risk balance has shifted.”

Tariffs Pose a Potential Risk

Addressing inflation, Powell explained that recent increases in goods prices are mainly driven by tariff policies rather than broad-based economic inflation. He acknowledged that tariff impacts could persist in a moderate way and warrant ongoing attention. When asked about the link between tariffs and inflation, he added, “We do see tariffs as a potential risk factor, but a larger risk stems from labor market weakness.”

Safeguarding Interest Rate Control Mechanisms

Responding to Congressional concerns over the Fed’s policy of paying interest on commercial bank reserves, Powell stated decisively that if the Fed stopped paying interest on reserves, it would lose its ability to control interest rates and cause greater market disruption. He explained that the reserve system has been proven over many years and is essential for effective monetary policy, so eliminating it would cause deeper market instability.

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Conclusion

Powell’s speech underscores a critical reality: the Federal Reserve is navigating a delicate balance. Inflation is still not fully contained. Employment data is weakening, and liquidity conditions are tightening. Every policy decision carries inherent risks.