Fed Chair Powell Warns: ’No Risk-Free Path’ as Job Market Shows Signs of Softening

Powell Drops Reality Bomb on Markets

The Fed's crystal ball looks cloudy as ever. Chair Jerome Powell just delivered the news everyone expected but nobody wanted to hear - the employment engine might be losing steam.

No Safe Harbors in This Storm

Forget about gentle landings and smooth transitions. Powell's message cuts straight to the chase: every policy move carries consequences, and central bankers aren't magicians. The 'no risk-free path' warning echoes through trading floors - a reminder that even the most careful calculations can't eliminate uncertainty.

Markets Brace for Impact

Traders now face the classic Fed dilemma - parse every syllable for hints about future moves while trying not to overreact. It's the financial equivalent of reading tea leaves during an earthquake.

Another day, another reminder that central bankers get paid to state the obvious while we all pretend it's profound wisdom.

Elevate Your Investing Strategy:

• Take advantage of TipRanks Premium at 50% off! Unlock powerful investing tools, advanced data, and expert analyst insights to help you invest with confidence.

Markets rallied after the remarks, with the Dow Jones Industrial Average and S&P 500 (SPX) both reversing earlier losses. Investors now expect two more quarter-point rate cuts this year, one at the end of October and another in December.

Powell Sees Jobs Weakening

Powell said the economy is still growing steadily, but the pressure on the labor market is becoming more evident. “The downside risks to employment appear to have risen,” he said, emphasizing that the Fed’s outlook now leans more toward supporting the job market.

While layoffs remain relatively low, hiring is slowing, and both businesses and households are reporting weaker perceptions of job availability. Powell suggested that the Fed is shifting its focus toward employment after more than a year of battling inflation.

Fed Faces Data Gaps and Tough Choices

The government shutdown has delayed the release of several key economic indicators, including the September jobs report, leaving policymakers without fresh data. “Available evidence suggests that both layoffs and hiring remain low, and that both households’ perceptions of job availability and firms’ perceptions of hiring difficulty continue their downward trajectories,” Powell said.

He acknowledged that the Fed faces a difficult balancing act. “There is no risk-free path for policy as we navigate the tension between our employment and inflation goals,” he said, referring to the dispersion of views among officials on how quickly to MOVE with rate cuts.

Inflation Still Lingers but Looks Contained

Inflation stood at 2.9% in August, slightly above the Fed’s target of 2%, and Powell said the uptick likely came from tariffs rather than broad price pressures. “The recent rise in inflation is due to tariffs and not broader inflationary pressures,” he noted.

He added that long-term inflation expectations remain stable, meaning the Fed still has flexibility to ease policy if the job market continues to weaken. Inflation has been above target for nearly five years, but Powell made clear that price stability must now be balanced with the need to protect employment.

Powell Hints Fed Could Soon Pause Balance Sheet Cuts

Powell also said the central bank may soon stop shrinking its balance sheet. “Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions,” he said. “We may approach that point in coming months.”

The Fed has been reducing its $6.6 trillion balance sheet since 2022 to unwind emergency stimulus from the pandemic era. Powell said the central bank is closely monitoring funding conditions to determine when to halt the runoff, a move that could help maintain liquidity as rates move lower.

Disagreement Builds over Timing of Future Cuts

The Fed cut rates by a quarter-point at its September meeting, bringing the target range to 4.00% to 4.25%. The decision was nearly unanimous, though newly appointed Governor Stephen Miran dissented in favor of a larger half-point cut. Powell said the debate reflects the challenge of balancing two objectives at once.

“The dispersion of Committee participants’ projections at the September meeting” showed that policymakers remain divided on the pace of future cuts, Powell said. Still, he added that “rising downside risks to employment have shifted our assessment of the balance of risks,” suggesting more easing ahead.

Investors Brace for a Busy End to the Year

Powell’s remarks reinforced expectations of lower rates and a softer job market. Stocks typically benefit from easier policy, though renewed labor weakness could limit optimism. Bond yields may drift lower as traders position for two more cuts before year-end.

The next Federal Reserve meeting will take place on October 28 and 29. According to the CME FedWatch Tool, markets currently see a 97% chance of another quarter-point rate cut. Powell’s tone and any new details on the balance sheet plan will be watched for clues about how far the Fed is willing to go.