Slowdown in US hiring suggests economy still needs rate cuts, Fed's Powell says

Federal Reserve Chair Jerome Powell indicated that a sharp slowdown in U.S. hiring poses a growing economic risk, reinforcing expectations for two additional interest rate cuts this year. While acknowledging tariffs have elevated inflation to 2.9%, Powell downplayed broader inflationary pressures. He also signaled the Fed might soon cease shrinking its $6.6 trillion balance sheet, a move that could influence longer-term Treasury rates, and retrospectively admitted the Fed "could have—and perhaps should have—stopped asset purchases sooner" during the pandemic.

Analysis

Federal Reserve Chair Jerome Powell indicated a significant slowdown in U.S. hiring poses an increasing risk to the economy, reinforcing expectations for two additional interest rate cuts this year, following the initial reduction in September. This assessment, despite a lack of official economic data due to the government shutdown, suggests a shift in the Fed's risk balance towards employment concerns over broader inflationary pressures.

While tariffs have elevated the Fed's preferred inflation measure to 2.9%, Powell explicitly stated the absence of "broader inflationary pressures" beyond these duties. Furthermore, he signaled the potential cessation of the Fed's balance sheet reduction, currently at $40 billion monthly in Treasuries and MBS, which could exert downward pressure on longer-term Treasury interest rates.

Powell also offered a retrospective on past asset purchases, acknowledging that the Fed "could have—and perhaps should have—stopped asset purchases sooner" during the pandemic, addressing criticisms regarding inflation and market impact. This forward-looking guidance, coupled with the balance sheet signal, suggests a dovish tilt in monetary policy aimed at supporting employment and managing borrowing costs.

Key Decisions for Investors

• Investors should adjust portfolios to reflect expectations of two additional Fed rate cuts this year, potentially benefiting interest-rate sensitive assets and sectors.
• Monitor longer-term Treasury yields for downward pressure as the Fed signals a potential halt to balance sheet reduction, impacting fixed-income allocations.
• Reassess economic growth outlooks, prioritizing sectors that could benefit from lower borrowing costs and increased liquidity, given the Fed's heightened focus on employment risks.