Federal Reserve Chair Jerome Powell highlighted a significant slowdown in hiring in the U.S. economy during a speech on Tuesday. This development raises concerns that the Federal Reserve may cut its key interest rate twice more before the end of the year. Despite the recent federal government shutdown limiting the availability of official economic data, Powell asserted that the employment and inflation outlook has remained largely unchanged since September. During the recent Federal Reserve meeting, officials projected further rate reductions, along with one anticipated rate cut in 2026. A decrease in interest rates could lead to more affordable borrowing costs for mortgages, car loans, and business loans, aiding economic activity.
In his remarks, Powell expressed increased apprehension regarding the job market's stability, prioritizing employment concerns slightly over maintaining price stability, which is another key responsibility of the Fed. He noted that tariffs have caused the Fed's preferred inflation measure to rise to 2.9%. However, he maintained that, apart from the impact of tariffs, there were no extensive inflationary pressures contributing to persistent high prices.
Powell stated, “Rising downside risks to employment have shifted our assessment of the balance of risks.” He also indicated that the Federal Reserve might be nearing the end of a strategy aimed at reducing its balance sheet, which currently stands at approximately $6.6 trillion. This process has allowed about $40 billion in Treasuries and mortgage-backed securities to mature each month without being reinvested, a practice that could affect long-term Treasury interest rates.
In addition to discussing interest rate policies, Powell defended the Fed's actions from 2020 and 2021, which involved purchasing longer-term Treasury bonds and mortgage-backed securities to mitigate the economic impact of the COVID-19 pandemic. These measures aimed to lower long-term interest rates and bolster economic support during a turbulent period. However, these strategies have faced criticism from various quarters, notably from Treasury Secretary Scott Bessent and potential candidates recommended by the Trump administration to succeed Powell as Chair later in 2025.
Bessent has publicly criticized the large-scale bond purchases, suggesting they exacerbated economic inequality by propelling the stock market without delivering significant advantages to the broader economy. Critics have argued that the Fed extended its asset purchases for an overly prolonged period, which contributed to rising inflation rates beginning in late 2021. In response to inflationary pressures, the Fed subsequently ceased these purchases and significantly raised borrowing costs.
Powell acknowledged the need for reflection regarding past decisions, stating, “With the clarity of hindsight, we could have—and perhaps should have—stopped asset purchases sooner.” He emphasized that the decisions made in real-time were driven by a desire to protect against potential downside risks. Additionally, he indicated that the purchases aimed to prevent a breakdown in the Treasury securities market, which could have resulted in sharply higher interest rates.
As the economic landscape evolves, the Federal Reserve faces the challenge of balancing its dual mandate of fostering maximum employment while ensuring price stability, amid an environment marked by slowing hiring and heightened risks of economic downturn.
