Fed Chair Powell worried about hiring slowdown — a sign more rate cuts are coming

Federal Reserve Chair Jerome Powell expressed growing concern over a hiring slowdown, signaling the likelihood of two additional interest rate cuts this year, despite tariffs pushing inflation to 2.9% without broader inflationary pressures. Powell also indicated the Fed might soon halt its $6.6 trillion balance sheet reduction, a move that could influence longer-term Treasury rates, while defending past asset purchases as necessary for market stability despite acknowledging they could have ended sooner.

Analysis

Federal Reserve Chair Jerome Powell signaled a significant dovish shift, expressing growing concern over a hiring slowdown as a primary risk to the US economy. This concern underpins the expectation for two additional interest rate cuts this year, aligning with the Fed's September meeting forecast. Such reductions in the key rate are anticipated to decrease borrowing costs across mortgages, car loans, and business loans, potentially stimulating economic activity.

Powell noted that while tariffs have elevated the Fed's preferred inflation measure to 2.9%, there are no "broader inflationary pressures" beyond these duties. Concurrently, the central bank may soon cease shrinking its $6.6 trillion balance sheet, which currently involves $40 billion in monthly Treasury and MBS maturities. This potential halt could exert downward pressure on longer-term Treasury interest rates.

The Fed's evolving risk assessment, driven by employment concerns, marks a shift in policy focus. Powell also addressed past quantitative easing, defending the 2020-2021 bond purchases as necessary for market stability, yet acknowledging with "hindsight" that asset purchases could have ended sooner. This reflects ongoing debate regarding the efficacy and timing of past monetary interventions.

Key Decisions for Investors

• Re-evaluate fixed income portfolios for lower short-term rates and potential downward pressure on longer-term Treasury yields, given the Fed's dovish stance and potential balance sheet changes.
• Consider increasing exposure to sectors sensitive to borrowing costs, such as housing and capital-intensive industries, given the prospect of further rate cuts.
• Monitor employment data and inflation ex-tariffs closely for signals on the Fed's future policy trajectory and balance sheet adjustments.