Powell: Another rate cut in December is not a certainty; government shutdown will impact economic activity.

PANews reported on October 30th that, according to Cailian Press, Federal Reserve Chairman Jerome Powell stated at a press conference that the market's expectation of another rate cut in December is "far from certain"—a statement that severely impacted risk assets currently being traded. Powell stated that current data suggests the outlook hasn't changed significantly, the economy is expanding moderately, the labor market appears to be gradually cooling, and inflation remains slightly high. "Data before the shutdown suggests the economy may be moving towards a more solid trajectory," Powell said. He added that the government shutdown will temporarily drag down economic activity, and current evidence suggests that layoffs and hiring remain low, with downside risks to employment appearing to have increased. These comments are consistent with the earlier policy statement. Regarding inflation, Powell added that the decline in services inflation appears to be continuing, most measures of long-term inflation expectations are in line with the target, but recent inflation expectations have risen as higher tariffs are pushing up prices for some goods. He also acknowledged that "in a reasonable baseline scenario, the impact of tariffs on inflation will be temporary." Powell emphasized the need to manage the risk of prolonged inflation, and the Fed has a responsibility to ensure it does not become a persistent problem and to respond promptly to economic developments.

During the Q&A session, Powell stated that if data shows an improvement in the job market, it would influence policy decisions. He mentioned uncertainty about what data the Fed would receive before the December meeting, and the lack of economic data could provide a reason to pause interest rate adjustments. Regarding "ending balance sheet reduction," Powell stated that the Fed cannot address both employment and inflation risks with a single tool, and the balance sheet decision allows the market some time to adjust. With money market liquidity tightening over the past three weeks, continuing balance sheet reduction would offer little benefit. Nick Timiraos, often referred to as the Fed's mouthpiece, commented that the FOMC, as a whole, does not agree with the market's high pricing of a December rate cut. This goes beyond their usual disclaimer that "policy does not follow a predetermined path." Timiraos believes this is clearly an attempt by the Fed to regain some policy flexibility to avoid being forced to take a specific action.