Powell’s warning to investors and lenders: The Fed won’t spoil the markets any longer
With rates in the 3 to 4% range, monetary policy is no longer restrictive
US FEDERAL Reserve chairman Jerome Powell seldom repeats himself, so Wall Street listened carefully when he delivered the same warning twice at a press conference following Wednesday’s (Oct 29) widely expected decision to cut interest rates.
A December rate cut is not a “foregone conclusion”, he warned. “Far from it.”
Similarly, Powell seldom talks about the rate-setting committee’s discussions about future meetings.
So, Wall Street ears perked up again when he said the starkest differences of opinion during the Federal Open Market Committee’s meeting this week were over its next move in December.
The message was loud and clear. Odds of a December rate cut dropped on Fed funds futures markets while Powell was conducting his press conference.
Powell described the decision to cut rates by 25 basis points to a range of between 3.75 and 4 per cent as relatively easy.
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There were two dissenters – Kansas City Federal Reserve president Jeffrey Schmid voted to remain on hold, while governor Stephan Miran, a Donald Trump appointee, pushed for a cut of 50 basis points.
That, said Powell, only proved that the middle course of action – the quarter-point cut – was the obvious compromise for all Fed members. The second rate cut of 2025 was an extension of the logic that motivated the first one in September, he said.
For much of this year, inflation and unemployment were rising simultaneously, creating tensions between the Fed’s two mandates to fight both, and hence forcing the central bank to go on hold. In the late summer, the unemployment rate in the US started to rise much more quickly than inflation.
The balance of risks was clear. The central bank cut rates in September and October as insurance against this sudden up-tick in unemployment becoming a recession, he said.
Now, the situation has changed again, Powell said. For one thing, with rates in the 3 to 4 per cent range, monetary policy is no longer restrictive. That means the Fed has taken its thumb off the economic scales, a natural moment for central bankers to observe whether the economy has found its own equilibrium.
Secondly, the spike in unemployment that seemed to be beginning in the summer has not materialised. There was, Powell acknowledged, a mass layoff from Amazon this week, as it let 14,000 white-collar workers go, reassigning much of their work to artificial-intelligence (AI) bots.
The Fed is not dismissing the risk that AI’s productivity could lead to more such layoffs, with some experts warning that more layoffs on the scale of what Amazon experienced are inevitable.
“The great expectation of AI creating massive increases in productivity translates into job losses,” said Oliver Pursche, senior vice-president at financial advisory Wealthspire.
“Also, as has always happened in the past when there have been significant tech advances, new job opportunities have come about.”
For now, however, Powell said that while the labour market was not as stable before, it was certainly not declining quickly either.
Many Wall Street economists are raising growth forecasts for 2026 following spending data.
Indeed, Powell’s impression of the US economy is still fairly rosy. The benign tariff scenario seems to be playing out so far, he added.
There has been a substantial increase in product inflation because of the duties on imports, but no accompanying wage spike, no increase in consumers’ inflation expectations, and no signs that the tariff inflation will be anything more than a one-time increase.
The last thing that has changed ahead of the December meeting is that the US government has shut down and stopped issuing economic data. The shutdown alone could lead to a pause in December, Powell hinted.
He compared the process of making monetary policy in the absence of data to driving a car in the fog.
“What do you do if you are driving in the fog?” he asked. “You slow down.”
Again, the suggestion was that December would be a natural time to pause, given the data fog.
The Fed’s December meeting will likely see a struggle between the Miran camp, who argue that the central bank can look through the tariff inflation at a time when there is so much slack in the labour market; and the Schmid camp, who consider the main risk to the economy as overheating.
Looking on with interest at this battle will be global markets. One reason that Powell pushed back so stridently on the idea that the Fed is on a preordained course to multiple rate cuts is that the idea has taken root on Wall Street.
This kind of complacency about a steady supply of cheap credit can lead to reckless investment and lending decisions. Investors and lenders should take note, Powell warned: The Fed is not going to spoil markets any longer.
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