Federal Reserve Chair Jerome Powell’s Economic Outlook
The Federal Reserve Chair, Jerome Powell, has emphasized the growing risk of a sharp slowdown in hiring to the U.S. economy. This indication suggests that the central bank is likely to cut its key interest rate twice more this year. Powell spoke before the National Association of Business Economics in Philadelphia, highlighting the potential risks to the job market despite the federal government shutdown cutting off official economic data.
Economic Outlook and Interest Rates
Powell noted that the outlook for employment and inflation does not appear to have changed much since the Fed’s September meeting, when the central bank reduced its key rate for the first time this year. Fed officials at the September meeting also forecast that the central bank would reduce its rate twice more this year and once in 2026. Lower rates from the Fed could reduce borrowing costs for consumer and business loans, making it cheaper for businesses to expand operations and hire new workers, and for Americans to buy houses, autos, and other items.
Impact on the Job Market
"Holding rates higher presents risks to the job market. Job creation is below trend given the pace of economic growth," noted Scott Helfstein, head of investment strategy at investment firm Global X. The Fed is still likely to cut rates in October and December, but investors should be prepared for a range of outcomes as Powell is trying to leave all options open. The Fed’s next rate decision will be made at its Oct. 29 meeting, followed by another rate decision meeting scheduled in 2025, set for Dec. 10.
Inflation and the Job Market
Powell reiterated that the Fed is slightly more worried about the job market than its other congressional mandate, which is to keep prices stable. Tariffs have lifted the Fed’s preferred measure of inflation to 2.9%, but outside the duties, there aren’t "broader inflationary pressures" that will keep prices high. "Rising downside risks to employment have shifted our assessment of the balance of risks," he said.
Balance Sheet and Treasury Bonds
The central bank may soon stop shrinking its roughly $6.6 trillion balance sheet. The Fed has been allowing roughly $40 billion of Treasuries and mortgage-backed securities to mature each month without replacing them. The shift could weigh on longer-term Treasury interest rates. Powell also spent most of his speech defending the Fed’s practice of buying longer-term Treasury bonds and mortgage-backed securities in 2020 and 2021, which were intended to lower longer-term interest rates and support the economy during the pandemic.
Criticism of the Fed’s Actions
Those purchases have come under criticism from Treasury Secretary Scott Bessent, as well as some of the candidates floated by the Trump administration to replace Powell when his term as Chair ends next May. Bessent argued that the huge purchases of bonds during the pandemic worsened inequality by boosting the stock market, without providing noticeable benefits to the economy. Other critics have long argued that the Fed kept implementing the purchases for too long, keeping interest rates low even as inflation began to spike in late 2021.
Response to Criticism
Powell acknowledged that with the clarity of hindsight, the Fed could have—and perhaps should have—stopped asset purchases sooner. The real-time decisions were intended to serve as insurance against downside risk. The purchases were also intended to avoid a breakdown in the market for Treasury securities, which could have sent interest rates much higher.
Conclusion
In conclusion, the Federal Reserve Chair Jerome Powell has emphasized the growing risk of a sharp slowdown in hiring to the U.S. economy, indicating that the central bank is likely to cut its key interest rate twice more this year. The Fed’s actions are intended to support the economy and job market, despite criticism of its past decisions. As the economy continues to evolve, the Fed will need to balance its dual mandate of maximum employment and price stability, while navigating the challenges of a complex and ever-changing economic landscape.
