Powell's speech prompts market reassessment: The Federal Reserve's rate cut path shows signs of a turnaround

At the recent Federal Reserve policy meeting, Chairman Jerome Powell’s remarks drew widespread market attention. Although the decision was to cut interest rates by 0.25 percentage points, the signals conveyed were far from the gentle tone many expected. The core message of Powell’s speech was: further policy adjustments are uncertain, and there are clear disagreements within the Fed about the future direction.

In terms of market reaction, Bitcoin (BTC) prices fell immediately after the announcement, briefly dropping to $109,200 and breaking the psychological $110,000 level. However, prices gradually recovered, rising back to around $111,000, indicating that the market is digesting this policy signal.

Inflationary Pressures Persist, Price Index Shows Complex Trends

According to Powell’s remarks, the Fed’s assessment of current inflation remains largely unchanged. While the latest Consumer Price Index (CPI) was slightly below expectations, Powell explicitly stated that inflation remains above the target level. The Personal Consumption Expenditures (PCE) index rose to 2.8%, suggesting some easing in price pressures but still well above the Fed’s 2% goal.

Notably, there are signs of moderate easing in inflation within the services sector, which the Fed views as a positive signal. Most long-term inflation expectations remain within target ranges, providing some policy space for decision-makers. However, emerging tariff issues are beginning to pressure commodity prices—based on current assumptions, the Fed believes tariffs will have only a short-term impact on inflation, but also emphasizes the need to ensure this impact does not evolve into persistent price problems.

Labor Market Shows Signs of Softening, Employment Growth Slows

Powell’s comments on the labor market reflect a key shift: demand for labor is clearly declining. While the market has not yet experienced a sharp downturn, layoffs and hiring levels are relatively subdued. The slow rise in unemployment benefit claims and a decline in job advertisements suggest economic growth is gradually slowing, which somewhat eases policymakers’ concerns.

Unemployment data across states remains relatively stable, with no signs of sharp deterioration. This supports the Fed’s view that the market is undergoing a smooth adjustment rather than a catastrophic recession. However, this gentle employment slowdown alone provides sufficient justification for further rate cuts.

December Rate Cut Expectations Fall Short, Policy Divisions Shape Outlook

The most notable part of Powell’s speech concerns the Fed’s uncertain stance on future policy paths. He explicitly stated that a further rate cut in December is not a scheduled plan, effectively overturning some market expectations. The rate cut decision at this meeting was based on risk management considerations, not an optimistic view of economic fundamentals.

More importantly, there are “strong disagreements” within the Fed regarding the next steps. Powell emphasized that, although the current rate cut was supported by a majority, members have widely differing views on future policy directions. This reflects a policy dilemma: on one hand, addressing the softening labor market; on the other, not ignoring the persistent inflation threats. He pointed out that the Fed cannot use a single tool to simultaneously solve employment issues and inflation risks, which is at the root of the policy deadlock.

Reserve Balance Sheet Normalization and New Outlook

Regarding the balance sheet, Powell’s remarks reveal a new approach. Reserve balances will continue to shrink as planned, but starting in December, this process will enter a relatively stable phase. Notably, Powell hinted that the Fed might restart increasing reserves at some point, aiming to transition toward a shorter-term asset and liability structure, though the exact endpoint remains uncertain.

Powell also emphasized that the current level of reserves slightly exceeds the assessment of full adequacy. This suggests future policy space on reserve adequacy may be more limited. As other liabilities grow, the relative proportion of reserves will further adjust, imposing new constraints on future policy operations.

Key Variables and Uncertainty in Policy Outlook

Powell’s speech indicates that employment data will be a crucial reference for future Fed decisions. If labor market conditions stabilize or strengthen, it could directly influence the Fed’s stance, potentially slowing or halting rate cuts.

It is important to recognize that Powell’s remarks present a highly uncertain policy environment. Internal disagreements, ongoing inflation concerns, worries about the labor market, and emerging tariff impacts all contribute to the complex situation the Fed faces. Market expectations for future Fed actions need to be dynamically adjusted based on monthly economic data, rather than relying on a fixed policy path. This speech essentially signals that the Fed’s current approach may prioritize flexibility and unpredictability as the new normal.