"Based on the data we have, it is fair to say that since our September meeting four weeks ago, the outlook for employment and inflation does not appear to have changed much." This statement by Federal Reserve Chairman Jerome Powell at the National Association for Business Economics annual meeting on October 14 was interpreted by the market as a clear signal for a rate cut in October.
Against the backdrop of missing key economic data due to the partial shutdown of the US government, Powell still pointed out that "downside risks to employment have increased", while emphasizing that there is "no risk-free path" for the Fed's interest rate policy. This speech set the tone for the Federal Reserve's policy meeting on October 28-29 and revealed that US monetary policymakers are walking a tightrope full of uncertainties.
With economic data missing and the policy path unclear, the Federal Reserve is searching for reasons to cut rates amid the fog.
01 Policy Shift: Cooling Labor Market Becomes the Core Logic for Rate Cuts
The core focus of Powell's speech was undoubtedly the significant cooling of the US labor market. He repeatedly mentioned the "slow pace of hiring" and pointed out that "job growth has slowed significantly."
● Change in Risk Balance: Powell made it clear that "downside risks to employment have increased, changing the Fed's assessment of risk balance." This judgment directly tilted the Fed's policy scale, shifting from the absolute priority of "curbing inflation" over the past two years to a more balanced view of employment and inflation risks.
● Insufficient Data Support: Although the official employment data for September was delayed due to the government shutdown, Powell pointed out that "existing evidence shows that layoffs and hiring numbers remain very low." He specifically mentioned that the number of job vacancies has further declined, "which is likely to be reflected in the unemployment rate."
● Increased Uncertainty: Powell admitted that he would not attempt to precisely determine the breakeven rate for employment, stating that "the standard error itself may be as high as 50,000," even suggesting that the "balanced level" of job creation may "have fallen below zero."
02 Data Dilemma: The Challenge of 'Flying Blind' Amid Government Shutdown
This Federal Reserve policy meeting faces a rare challenge—the partial shutdown of the US federal government has led to the absence of key economic data.
● Limitations of Alternative Data: In the Q&A session, Powell admitted that due to the government "shutdown" and the resulting lack of nonfarm payroll reports and other data, everyone is looking at the same private sector employment data. But he emphasized, "State-level employment data and the ADP employment report cannot replace the gold standard that constitutes official statistics."
● Monitoring Mechanism Activated: In the face of this dilemma, Powell stated that "the Fed has its own contacts and data sources to monitor the health of the US economy." He specifically mentioned that this information will be summarized in the upcoming Beige Book.
● Future Risk Warning: Powell warned, "If the government shutdown continues and October data is delayed, the Fed will begin to miss data, and the situation will become even more severe." This statement reveals the "flying blind" risk that may be faced at the October policy meeting.
03 Inflation Perspective: Tariffs Drive Prices Rather Than Broad-Based Pressure
Although the labor market is showing signs of cooling, inflation remains a policy consideration that the Fed cannot ignore. In his speech, Powell tried to ease market concerns about inflation.
● Attributing to Tariff Policy: Powell pointed out that "the rise in commodity prices mainly reflects tariffs, rather than broader inflationary pressures." He believes that "US tariff policy has caused a certain degree of increase in commodity prices, but there is little sign of 'broader inflationary pressure.'"
● Long-Term Expectations Stable: At the same time, Powell emphasized that "long-term inflation expectations remain consistent with the Fed's 2% target," which provides a basis for the Fed to continue cutting rates even when inflation remains above the 2% target.
● The Art of Risk Balance: Powell admitted, "If the Fed acts too quickly, it may leave the anti-inflation task unfinished." But he also warned, "Acting too slowly could put pressure on the labor market," highlighting the Fed's policy dilemma of walking a tightrope.
Table: Comparison of Powell's Key Speech Points
Policy Aspect | Main Statement | Policy Implication |
Interest Rate Policy | "There is no risk-free policy path" | Suggests continued cautious rate cuts |
Labor Market | "Downside risks to employment have increased" | Policy focus shifts toward employment |
Inflation Assessment | "Inflation mainly reflects tariff factors" | Clears obstacles for rate cuts |
Balance Sheet Reduction | "May be close to stopping balance sheet reduction in the coming months" | Liquidity tightening cycle nearing its end |
04 Balance Sheet Reduction: Quantitative Tightening Nears Its End
In addition to interest rate policy, Powell also brought important news about the Fed's balance sheet: the years-long policy of quantitative tightening may be coming to an end.
Clear Time Frame: Powell stated, "The Fed's long-standing plan is to stop action when reserves are slightly above the level judged by the Fed to be ample. We may be approaching this level in the coming months." This statement provided the market with a clear expectation.
Lessons from History: Powell acknowledged that there are signs liquidity is gradually tightening. He specifically mentioned that the Fed's "plan indicates they will take cautious measures to avoid a repeat of the money market tensions seen in September 2019."
Flexible Policy Space: Powell believes that "the Fed has more 'flexible' space regarding the size of its balance sheet." This statement suggests that the Fed may flexibly adjust its balance sheet policy according to market conditions in the future.
05 Market Reaction: Rate Cut Expectations Heat Up, US Stocks Rebound After Dipping
After Powell's speech, financial markets reacted quickly, with expectations for a rate cut in October rising sharply.
● Expectation Probability Soars: According to the CME "FedWatch" tool, the probability of the Fed cutting rates by 25 basis points in October reached 97.3%; the probability of a cumulative 50 basis point cut by December was as high as 93.5%.
● US Stocks Volatile: In the overnight US stock market, the three major indices all rebounded after dipping. The Dow turned positive and closed up 0.44%; the Nasdaq narrowed its decline from 2.12% to 0.76%; the S&P 500 index fell 0.16%. This trend indicates that Powell's dovish remarks to some extent eased market concerns about the economic outlook.
● Consensus Among Experts: JPMorgan Chief US Economist Michael Feroli said Powell's latest speech "solidified expectations for further rate cuts." MacroPolicy Perspectives founder Julia Coronado was even more direct, stating that the Fed's October rate cut is "a done deal."
Table: Changes in Fed Rate Cut Probabilities for October-December
Time Frame | No Change | 25 Basis Point Cut | 50 Basis Point Cut |
October Meeting | 2.7% | 97.3% | - |
December Cumulative | 0.1% | 6.4% | 93.5% |
Conclusion
Powell's speech was a precise policy guide amid the data fog.
He not only paved the way for a rate cut in October but also set a time frame for the conclusion of balance sheet reduction.
As the October 30 policy meeting approaches, the Fed will perform a high-difficulty "tightrope act" amid incomplete data. Against the backdrop of a slowing global economy, every decision by the Fed will tug at the nerves of global markets.
