Powell's Speech: Fed Cut Rates, But December Uncertain

The speech by Federal Reserve Chair Jerome Powell after the regulator’s decision to cut interest rates by a quarter of a percentage point marked a turning point in understanding the future direction of U.S. monetary policy. However, contrary to some market participants’ expectations, this speech cannot be clearly characterized as a dovish signal. On the contrary, Powell emphasized that further rate cuts in December are not a predetermined scenario, and there are significantly differing views among Fed members on monetary policy matters.

Key Signals from the Fed Chair’s Speech

Powell began with a clear message: fighting inflation remains a challenging task. He noted that the PCE (personal consumption expenditures) index rose to 2.8%, only slightly above the target level. Meanwhile, the Consumer Price Index was slightly below analysts’ expectations, but this does not mean a complete victory over inflation. Most measures of long-term inflation expectations align with the target, but vigilance is still necessary.

Powell paid particular attention to tariffs. He stated that tariff increases lead to higher prices for certain goods, but a reasonable baseline scenario suggests a short-term impact on prices. However, the Fed must ensure that the effect of tariffs does not turn into a persistent inflation problem.

Uncertainty Regarding December Decisions

The most notable point in Powell’s speech concerned the future trajectory of rate cuts. The Fed Chair unequivocally stated that further reductions in December are not certain. Today’s meeting revealed strongly differing opinions on future actions, and a decision for December has not yet been made. This stance significantly differs from the more optimistic expectations of some market participants, who anticipated a more aggressive rate reduction.

Powell emphasized that today’s rate cut was primarily a risk management measure. Although the decision was made by a majority, sharply differing views among Fed members concerned future steps. A new phase of balancing will begin in December, which is expected to remain stable for some time.

Labor Market Between Optimism and Concerns

Regarding the labor market, Powell noted that demand for labor has clearly decreased. Layoffs and hiring remain low, indicating a gradual slowdown in growth. At the same time, the labor market is not experiencing a rapid decline — the absence of a sharp increase in unemployment benefit claims and a decrease in open vacancies provide some confidence in its stability.

The outlook for employment and inflation has hardly changed since the September meeting, the Fed Chair said. Before the government shutdown, data showed that economic growth could be more sustainable. The shutdown itself negatively impacts economic activity, but the situation should normalize once it ends.

Reserve Management and Long-Term Strategy

Powell dedicated a separate part of his speech to Fed reserve management. He announced that at some point, the Fed will resume replenishing reserves, but the final target level has not yet been determined. The regulator intends to move toward a shorter balance sheet runoff, but the ultimate strategy is still under discussion.

There is a clear assessment that current reserves slightly exceed the adequate level. Reserves will continue to decline as other Fed liabilities grow. All this indicates a complex balancing act between different monetary policy goals.

Conflicting Goals in a Single Tool

Powell openly acknowledged a fundamental challenge facing the Fed: it is impossible to simultaneously address employment issues and inflation risks using only one tool — the interest rate. The risk balance has shifted, and there is no risk-free path for policy. If data shows stabilization or strengthening of the labor market, it will influence future rate cut decisions.

Market Reaction to Powell’s Speech

Following the news of Powell’s speech, Bitcoin fell below $110,000, reaching a local low of around $109,200. This movement reflected disappointment among some market participants expecting a more dovish tone. However, the subsequent recovery above $111,000 indicates that the market has rethought the Fed’s position.

The key takeaway from Powell’s speech: the Fed will act more cautiously in the coming months than optimists expected. Rate reduction decisions will be based on incoming data rather than a predetermined scenario. This implies increased volatility for financial markets around the release of economic statistics.