Powell Cautions Against December Rate Cut Assumptions

Fed Chair Powell Issues Warning on Rate Cuts

On Wednesday, Federal Reserve Chair Jerome Powell urged market participants to temper their expectations regarding a potential rate cut in December. He highlighted the significant divisions among Fed governors concerning the best course of action, particularly in light of rising inflation concerns and a softening labor market.

No Certainty on Future Rate Reductions

During his post-meeting press conference, Powell remarked, “A further reduction in the policy rate at the December meeting is not a foregone conclusion—far from it.” This statement underscores the uncertainty surrounding monetary policy as the Fed navigates challenging economic conditions.

Recent Rate Cut and Its Implications

The Federal Reserve recently reduced its benchmark interest rate by a quarter percentage point, bringing it to a range of 3.75% to 4%. This decision was driven by observations of cooling labor conditions coupled with persistently high inflation rates.

Powell characterized this move as a step towards achieving a “more neutral policy stance,” but he was quick to remind that navigating forward carries inherent risks, stating, “there is no risk-free path.”

Inflation Trends and Labor Market Observations

Despite a notable decline in inflation from its peaks in 2022, Powell pointed out that recent price pressures have emerged within certain goods categories, which he attributed in part to rising tariffs. As a result, the Fed perceives that near-term inflation risks are skewed to the upside, even as the momentum in the job market appears to be waning.

“Conditions in the labor market appear to be gradually cooling,” he noted, while also mentioning that “downside risks to employment have increased in recent months.”

Diverse Perspectives within the Fed

This divergence of opinion among Federal Open Market Committee officials reflects a broader concern: some are apprehensive that further easing could reignite inflation, while others worry that maintaining a tighter policy could lead to a more severe economic slowdown.

Powell articulated this tension by stating, “The risks are to the upside for inflation and to the downside for employment. You can’t do both of those at once with one tool.”

Changes to the Fed's Balance Sheet Policy

In addition to discussing interest rates, the Fed also revealed plans to conclude its balance sheet runoff—effectively ending the phase known as “quantitative tightening” on December 1. This decision comes after a substantial reduction of $2.2 trillion in its securities holdings over the last three and a half years. Powell indicated that recent pressures observed in money markets suggest the financial system has now reached conditions characterized by “ample reserves.”

Future Outlook and Data Dependency

Looking ahead, Powell emphasized the Fed's commitment to remaining data-dependent. He stated, “We remain well positioned to respond in a timely way to potential economic developments. Policy is not on a preset course.” This commitment to adaptability highlights the Fed's intention to respond effectively to evolving economic conditions.

This article was originally published on Fortune.com.