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

Federal Reserve Chair Jerome Powell indicated the likelihood of two more interest rate cuts this year, citing a significant slowdown in U.S. hiring as a growing economic risk and prioritizing job market concerns over broader inflationary pressures. His remarks solidified market expectations for further easing, potentially starting at the next meeting, and he also suggested the Fed may soon cease shrinking its $6.6 trillion balance sheet, which could further reduce borrowing costs. Powell's comments underscore the Fed's dovish pivot in response to employment trends, despite defending past pandemic-era asset purchases and the necessity of paying interest on bank reserves.

Analysis

Federal Reserve Chair Jerome Powell signaled a strong likelihood of two additional interest rate cuts this year, following the initial September reduction, driven by growing concerns over a sharp slowdown in U.S. hiring. Powell emphasized that "rising downside risks to employment have shifted our assessment of the balance of risks," prioritizing job market stability over inflation, which he noted is largely tariff-driven at 2.9% without broader underlying pressures. This dovish pivot solidifies market expectations for further easing, potentially commencing at the next FOMC meeting.

Beyond rate adjustments, Powell indicated the Federal Reserve may soon halt the shrinking of its $6.6 trillion balance sheet, which currently allows $40 billion in Treasuries and mortgage-backed securities to mature monthly. This potential cessation, combined with rate cuts, is anticipated to further reduce borrowing costs. Economists, including JPMorgan's Michael Feroli, confirmed Powell's remarks strongly affirm expectations for upcoming rate reductions, with Treasury yields ticking down slightly post-announcement.

Powell also addressed past criticisms concerning the Fed's pandemic-era asset purchases, acknowledging that "we could have—and perhaps should have—stopped asset purchases sooner," but maintained an earlier cessation would not have fundamentally altered the COVID-era inflation trajectory. He further defended paying interest on bank reserves, asserting its removal would cause the Fed to "lose control over rates," a position recently affirmed by an 83-14 Senate vote against a measure to halt such payments.

Key Decisions for Investors

• Investors should anticipate continued downward pressure on Treasury yields and other borrowing costs as the Fed signals further rate cuts and a potential halt to balance sheet runoff.
• Consider re-evaluating fixed income portfolio duration and assessing equity exposure, particularly in rate-sensitive sectors like housing, autos, and growth-oriented companies, given the dovish monetary policy outlook.
• Closely monitor upcoming employment data and inflation metrics, as the Fed's prioritization of job market stability will dictate the pace and extent of future policy adjustments.