Powell Cautions Against Assuming More Cuts, Cites Uncertainty and Split Within FOMC

Powell Tempers Market Optimism After Fed’s Second Rate Cut

The Federal Reserve delivered its second consecutive rate cut on Wednesday, reducing the benchmark federal funds rate by 25 basis points to a target range of 3.75%–4.00%. While the move was widely anticipated, the market reaction turned cautious after Fed Chair Jerome Powell pushed back against expectations for another cut in December, emphasizing internal divisions and incomplete economic data due to the ongoing federal government shutdown.

Initially, equity indexes held their gains and Treasury yields ticked higher on the rate cut and dovish tone of the statement. However, stocks reversed course following Powell’s press conference, where he stated that another reduction in December was “not a foregone conclusion,” noting that FOMC members had “strongly differing views” on the next step.

Balance Sheet Runoff to End in December

In a notable shift in policy stance, the Fed announced it would halt its balance sheet reduction program on December 1. The central bank has reduced its holdings by approximately $2.3 trillion since quantitative tightening began, bringing its balance sheet down to $6.6 trillion.

However, recent funding market stress signaled limits to how much further tightening could proceed without adverse effects. Proceeds from maturing mortgage-backed securities will now be reinvested into shorter-term Treasury bills, reflecting a more cautious liquidity stance moving forward.

Economic Signals Mixed as Data Blackout Obscures View

The FOMC statement upgraded its view on growth, citing that “economic activity has been expanding at a moderate pace,” compared to September’s more subdued language. Powell reinforced this during his press conference, pointing to stronger-than-expected consumer spending before the data blackout.

Still, labor market signals were less encouraging, with the committee acknowledging that “job gains have slowed” and that “downside risks to employment rose in recent months.”

Inflation Still Elevated Despite Rate Cuts

Persistent inflation remains a challenge for the Fed. The central bank noted that price pressures “remain somewhat elevated,” with recent CPI data showing annual inflation at 3%—still above its 2% target.

Notably, last week’s CPI report was one of the few economic indicators released during the shutdown. Higher energy costs and lingering effects of Trump-era tariffs contributed to the uptick, adding complexity to future policy decisions.

Market Forecast: Cautiously Bullish in the Short Term

While Powell’s comments injected near-term uncertainty, the overall policy tone remains accommodative. The end of quantitative tightening, combined with resilient equity markets and a still-expanding economy, supports a short-term bullish view.

However, traders should remain alert to labor market signals and inflation trends, especially given the Fed’s limited visibility heading into its December meeting.

More Information in our Economic Calendar.