Markets rise as Powell flags growing labour risks ahead of October Fed meeting
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The news: US Federal Reserve Chair Jerome Powell said downside risks to the job market have risen, prompting renewed market bets on further rate cuts and lifting stocks, as the Fed continues to operate without key data during the government shutdown.
Speaking at the National Association for Business Economics conference in Philadelphia, Powell also said the Fed could soon end its balance sheet runoff, with bank reserves nearing the level considered sufficient to maintain stable money market conditions.
The context: Powell’s last scheduled public remarks before the Fed’s 28-29 October meeting came as the central bank navigates rising downside risks to employment, inflation still above target, and missing data due to the US government shutdown.
What they said: Powell said “Rising downside risks to employment have shifted our assessment of the balance of risks. As a result, we judged it appropriate to take another step toward a more neutral policy stance at our September meeting.”
He added that “Based on the data that we do have, it is fair to say that the outlook for employment and inflation does not appear to have changed much since our September meeting four weeks ago.”
The Fed cut rates by 25bp in September and projected two more cuts this year.
Powell said core inflation has risen slightly, driven mainly by goods price increases linked to tariffs, rather than broader inflationary pressures.
With key official data delayed by the shutdown, Powell said the Fed is relying on a wide range of public and private-sector sources, as well as insights from its regional Reserve Banks that produce the beige book (due tomorrow).
He described official data as the “gold standard” and said while alternative sources remain available, the absence of federal statistics is starting to affect policymaking. He warned that the longer the shutdown lasts, the more difficult it will become, as the data not only go unpublished but may not be collected at all.
While the September employment is delayed due to the government shutdown, inflation figures are scheduled for release next Friday (24 October), just days before the Fed’s October meeting.
The numbers: Powell’s remarks prompted a shift in market expectations, with investors reinforcing bets on two more 25bp rate cuts this year. Stocks rose, short-dated Treasury yields fell and the dollar weakened following his speech.
The Dow Jones Industrial Average reversed losses to be 0.89% higher while the S&P 500 also turned positive (+0.31%).
Powell said the Fed may stop shrinking its balance sheet “in coming months”, as reserves approach the level considered consistent with ample conditions. The Fed has reduced its holdings by USD2.2 trillion ($3.4 trillion) since mid-2022, with bank reserves now sitting just below USD3 trillion.
The Fed’s balance sheet currently stands at around USD6.5 trillion, Powell said, down from a peak of nearly USD9 trillion during its pandemic-era stimulus program.
The sources: US Federal Reserve, The Wall Street Journal, Bloomberg
