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Federal Reserve Chairman Jerome Powell has signaled that the Fed is poised to cut rates at its upcoming meeting in later this month. The Fed’s decision on continuing its rate cut cycle comes despite limited clarity into the economy due to the ongoing government shutdown that has entered its third week, with key economic data releases remaining suspended, alongside renewed trade tensions between the US and China.
Interest Rate Cut Expected
While speaking at the National Association for Business Economics annual meeting on October 14, Fed Chair Powell stated that the Fed is on track to reduce interest rates by 25 basis points at the upcoming FOMC meeting on October 29. The pace of the Fed’s rate cuts was not consistent, as the previous rate cut in September was implemented due to job slowdown during the summer following the earlier cut that occurred in December 2024.
Powell stated that the economic outlook hasn’t changed much since the September meeting, where FOMC policymakers expected two more 25 basis point rate cuts for 2025. However, opinions among FOMC members remain divided, with nine of its 19 policymakers pushing for only one more or no rate cuts for 2025. ⁽¹⁾
As the unemployment rate stands stable at 4.3% in August, Powell warned that further declines in job openings could cause a rise in unemployment, signaling a cautious approach towards monetary policy.
Possible Ending for Quantitative Tightening and Balance Sheet Changes
Powell also suggested during his speech that the Fed will reach a point where it will stop reducing its size of its bond holdings, indicating an end of it quantitative tightening operations, but hasn’t specified a date yet. ⁽²⁾
Powell noted that liquidity conditions are tightening, suggesting that the balance sheet reduction may soon end, though the Fed won’t return to its pre-Covid level of $4 trillion. He stated that the excess reserves framework remains effective for monetary policy. ⁽³⁾
Powell also expressed concerns about interest payments on bank reserves. Treasury Secretary Bessent and Senator Cruz have proposed to end interest payments on government debt, but Powell has warned that doing so would be a mistake, hinting that it would damage the Fed’s control over interest rates and the Fed’s ability to manage the economy. ⁽⁴⁾
Government Shutdown Continues to Delay Economic Data
The ongoing government shutdown has complicated the Fed’s outlook and decision-making process as the shutdown continues to delay the release of key economic data. The Bureau of Labor Statistics has delayed the release of the September jobs report but has stated that the CPI report for September will be released on October 24. ⁽⁵⁾
Powell praised the importance of government data but noted that the Fed is turning to private-sector sources to fill the void. The absence of data heightens the risk of policy missteps, as the Fed struggles to determine the economy’s path without economic updates. ⁽⁶⁾
The delay in economic releases is a problem for the Fed’s dual mandate of price stability and maximum employment, indicating that they are currently at risk. Inflation still remains well above the Fed’s 2% target, while signs of weakness in the labor market persists.
Market Reaction
Stocks were volatile on October 15, as the markets digested the impacts of the dovish comments from the Fed and the heightened trade tensions between the US and China. Both the S&P 500 and the Nasdaq 100 ended the session positively after encountering volatility in the beginning of the session as markets were impressed by strong corporate earnings from big banks such as JP Morgan, Goldman Sachs and Bank of America. The Russell 2000 traded near its record high of 2,530.
Broader Economic and Geopolitical Pressures
The Fed is also dealing with more economic and geopolitical uncertainty, as the resurgence of trade tensions between the US and China continue to cause market volatility. In response to China’s sanctions on five US companies of the South Korean shipbuilder Hanwha, US President Trump is considering to implement further trade restrictions on China because of its refusal to buy US soybeans.
These developments are making it harder for the Fed to manage the economy, as trade disruptions could fuel inflationary pressures or hurt growth. The White House is scrambling to manage funds for law enforcement and military personnel as President Trump prepares to announce a list of targeted budget cuts to federal agencies. ⁽⁷⁾
The Federal Reserve must be cautious as it gets ready for its October meeting. Concerns about a deteriorating labor market are reflected in the expected rate cut, but there are also major obstacles due to geopolitics, delayed data releases, and ongoing inflation and data scarcity.
