Fed Chair Powell Sees More Job Market Weakness. ‘There Is No Risk-Free Path.’

Federal Reserve Chair Jerome Powell continues to highlight the Fed’s data dependence, but the government shutdown has led to the suspension this month of key economic data. (Chip Somodevilla/Getty Images)

Federal Reserve Chair Jerome Powell signaled Tuesday that downward pressure on the labor market means there is more room for further interest-rate cuts.

That’s in line with the majority of policymakers who have called for two more rate cuts this year—one at the central bank’s Oct. 28-29 policy meeting and another at their December meeting.

The economy, he said, is on a “somewhat firmer trajectory than expected,” Powell said Tuesday in remarks before the National Association for Business Economics in Philadelphia. However, “the downside risks to employment appear to have risen.”

Markets rallied on the news with the Dow Jones Industrial Average and S&P 500 erasing earlier losses.

Tuesday’s speech comes in the absence of fresh economic data, as the government shutdown, which began Oct. 1, has delayed the release of September jobs numbers. Still, Powell said the available data show that not much has changed since the last policy meeting four weeks ago.

“Available evidence suggests that both layoffs and hiring remain low, and that both households’ perceptions of job availability and firms’ perceptions of hiring difficulty continue their downward trajectories,” he said.

Inflation, meanwhile, sits at 2.9% as of August, up from earlier this year. It has remained stubbornly above the central bank’s 2% target for nearly five years. Still, Powell said he believes the recent rise in inflation is due to tariffs and not “broader inflationary pressures.” Long-term expectations, he said, still remain in line with the Fed’s target.

Powell’s comments mark his first major public appearance since the Fed’s policy meeting last month, which exposed deep divisions among Fed officials about the timing and magnitude of future interest-rate cuts.

The Fed lowered rates by a quarter of a percentage point at its September meeting, to a target range of 4.00% to 4.25%. The decision was nearly unanimous; only newly installed Fed Gov. Stephen Miran dissented in favor of a half-point cut. But Fed officials’ economic projections told a different story: Policymakers were nearly split down the middle between those who see the need for additional cuts this year and those who think the current policy stance is sufficiently accommodative.

“There is no risk-free path for policy as we navigate the tension between our employment and inflation goals. This challenge was evident in the dispersion of Committee participants’ projections at the September meeting,” Powell said Tuesday.

The Fed’s dual mandate stipulates that it must pursue full employment and price stability, a charge now challenged by competing concerns. But, Powell said, “rising downside risks to employment have shifted our assessment of the balance of risks.” In other words, the Fed is pulling some of its focus away from inflation, which reached a 40-year high of 9.1% in June 2022, and shifting it to the labor market.

Powell also indicated that the Federal Reserve may stop shrinking its balance sheet in the next few months.

“Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions,” Powell said. “We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision.”

The central bank has been shrinking its $6.6 trillion balance sheet since 2022, getting rid of some of the trillions in assets purchased during the pandemic to stimulate economic growth.

Powell spent much of his speech defending the Federal Reserve’s balance sheet and ample reserves regime, the central bank’s method for controlling short-term interest rates by keeping a large supply of money in the banking system. The Fed is able to directly set the target interest rate by adjusting the interest it pays banks on those reserves.

Some contenders for Fed chair, including former Fed governor Kevin Warsh, have been vocal about their plans to significantly reduce the balance sheet. Warsh has said he also plans to give Treasury Secretary Scott Bessent a large share of the responsibility for how and when balance sheet reductions happen. That would be a significant policy shift that could weaken the Fed’s longstanding independence from the federal government and White House.

“The Treasury secretary would need to find the proposed change in Fed holdings acceptable, given that it is partially fiscal policy in disguise,” Warsh told Barron’s.

Tuesday’s speech comes days before the Fed enters its premeeting blackout period at the end of this week. Investors currently see a 97% chance of another quarter-point rate cut at the Oct. 28-29 meeting, according to the CME FedWatch tool.

Write to Nicole Goodkind at nicole.goodkind@barrons.com.