Federal Reserve Chair Signals Dovish Tilt Amid Cooling Jobs Market
The U.S. labor market is showing renewed signs of strain, and Federal Reserve Chair Jerome Powell suggested on Tuesday that the central bank could be prepared to support another interest rate cut later this month. Speaking in Philadelphia, Powell warned that the downside risks to employment had risen, a notable appearance of openness to additional monetary easing despite recent economic data.
Powell noted that even without fresh Bureau of Labor Statistics numbers — delayed due to the federal government shutdown — privately produced measures of the jobs market and internal Fed research provided evidence that the labor market was cooling. He said the “available evidence” showed that while layoffs and hiring were still occurring, they remained subdued and that both households’ perceptions of job availability and firms’ hiring difficulty were trending downward.
The remarks align with market expectations that the Fed could implement another quarter-point cut in borrowing costs at its October policy meeting. Investors have priced in the possibility of further easing as the central bank navigates a delicate balance between supporting employment and containing inflation.
Why Powell’s Cues Matter for Policy
The Fed’s dual mandate requires the central bank to pursue maximum employment and stable 2% inflation. Powell asserted that longer-term inflation expectations remained aligned with the 2% goal, even as tariff-related price pressures linger. He cautioned that while tariffs may raise some consumer prices, there were not yet broad inflationary indicators signaling an imminent breakout.
Last month, the Fed enacted its first rate cut since December, trimming the federal funds target range to 4-4.25%. The move signaled the onset of a more accommodative stance as the labor market showed signs of softening. The October meeting, set for October 28-29, is widely expected to yield another rate reduction, a development that would consolidate Powell’s shift toward a more dovish monetary policy posture.
Broader Economic Context: Tariffs, Inflation, and QE
The policy backdrop remains complex. President Donald Trump’s tariff policy has raised costs for some imported goods, yet Powell stressed that broader inflationary pressures had not accelerated in a sustained way. In a related discussion, Powell acknowledged that the Federal Reserve’s balance sheet has ballooned due to quantitative easing implemented during the pandemic and the global financial crisis. He suggested that the Fed could pause its quantitative tightening operations in the coming months, while continuing to monitor a wide range of indicators to guide that decision.
During the crisis era, the Fed’s balance sheet expanded dramatically as it purchased trillions of dollars in Treasuries and mortgage-backed securities to stabilise markets. Treasury Secretary Scott Bessent has highlighted concerns about the size of the balance sheet, pointing to the need for a gradual normalization that reflects ongoing demand for reserves as the banking system evolves.
What This Means for Borrowers and Markets
For households and businesses, Powell’s remarks suggest continued flexibility in monetary policy. A potential additional rate cut could provide relief to borrowers and support cautious investment and hiring. However, the path remains contingent on how inflation trends unfold and how tariff-driven price pressures evolve in the coming weeks.
As markets digest these signals, traders will be watching data releases and Fed communications closely to gauge the likelihood and timing of further easing. The balance between keeping inflation in check and supporting employment will continue to define the central bank’s approach in the weeks ahead.