On Tuesday, Federal Reserve Chairman Jerome Powell warned that a significant slowdown in employment is raising risks for the U.S. economy. This has led to indications that the Fed might lower its key interest rates two more times before the year ends.
Powell noted in his written remarks that, despite the federal government shutdown which has halted the release of official economic data, “the outlook for employment and inflation appears unchanged since our September meeting,” where interest rates were first cut this year.
During the September meeting, Fed officials had also indicated they anticipated additional rate cuts, projecting a total of two more cuts in 2023 and one in 2026.
These potential interest rate reductions could help lower borrowing costs for mortgages, auto loans, and business loans. Powell addressed these points at the National Association for Business Economics meeting in Philadelphia.
He reiterated his previous comments from after the September meeting, expressing a bit more concern regarding the job market in comparison to Congress’s mandate to keep inflation in check.
While tariffs have raised the Fed’s most recommended inflation indicator to 2.9%, Powell stated there are no significant inflationary pressures beyond those tariffs that would keep prices elevated.
“The heightened downside risks to employment have changed our assessment of the balance of risks,” he remarked.
Additionally, Powell mentioned that the central bank might soon pause its $6.6 trillion balance sheet reduction strategy. Previously, the Fed had allowed about $40 billion in U.S. Treasuries and mortgage-backed securities to mature each month without replacement, which could influence long-term U.S. Treasury yields.
In a separate part of his speech, Powell defended the Fed’s decision to purchase long-term Treasury bonds and mortgage-backed securities during 2020 and 2021, aiming to keep long-term interest rates low and to bolster the economy throughout the pandemic.
However, these actions have faced substantial criticism from Treasury Secretary Scott Bessent. Some candidates have suggested him as a potential successor to Powell when his term concludes next May.
Bessent has stated that, amid widespread critique, these substantial bond purchases during the pandemic have inflated stock markets and exacerbated inequality without delivering significant economic benefits.
Critics have also asserted that the Fed maintained these purchases too long, contributing to low interest rates even as inflation rates began to surge in late 2021. The Fed eventually halted its purchases in early 2021 and raised borrowing costs significantly to counter inflation.
Powell acknowledged, “In hindsight, we could and should have stopped the asset purchases sooner. Our real-time decisions were intended to act as insurance against downside risk.”
He added that these purchases were critical in preventing a potential collapse of the U.S. Treasury market, which could have led to a significant rise in interest rates.
