Slowing U.S. hiring suggests economy still needs rate cuts, says Fed Powell

WASHINGTON (AP) – A strong slowdown in hiring That poses a growing risk to the U.S. economy, Federal Reserve Chairman Jerome Powell said Tuesday, a sign that the Fed will likely cut its benchmark interest rate twice this year.

Powell said in a speech in Philadelphia that despite the federal government shutdown Cutting through official economic data, “the employment and inflation outlook does not appear to have changed much since our September meeting,” when the Fed reduces its key rate for the first time this year.

Fed officials at that meeting also forecast that the central bank would cut rates twice more this year and once in 2026. A Fed rate cut could lower borrowing costs for mortgages, auto loans and business loans. Powell spoke before a meeting of the National Association of Business Economics.

Powell reiterated a message he first delivered after the September meeting, when he signaled that the Fed was slightly more concerned about the labor market than its other congressional mandate, which is to keep prices stable. The tariffs raised the Fed’s preferred inflation measure to 2.9%, he said, but outside of the tariffs there are no “broader inflationary pressures” that will keep prices high.

“Increased downside risks to employment have changed our assessment of the balance of risks,” he said.

Economists said Powell’s remarks boosted expectations of further rate cuts, starting at the next meeting on October 28-29.

“While there was no doubt that (the Fed) was prepared to cut rates at its next meeting, today’s remarks clearly confirm that expectation,” Michael Feroli, chief U.S. economist at JPMorgan Chase, said in a note to clients.

Powell also said the central bank may soon stop shrinking its balance sheet by about $6.6 trillion. The Fed let about $40 billion in Treasurys and mortgage-backed securities mature each month without replacing them.

“We could approach that point in the coming months,” Powell said.

This change could slightly reduce borrowing costs over time. Economists at BMO Capital Markets estimated that Treasury yields fell slightly after Powell’s remarks.

Separately, Powell spent most of his speech defending the Fed’s practice of purchasing long-term Treasurys and mortgage-backed securities in 2020 and 2021, which were intended to lower long-term interest rates and support the economy during the pandemic.

Yet these purchases have been the subject of a torrent of criticism from Treasury Secretary Scott Bessent, as well as some of the candidates launched by the Trump administration to replace Powell when his term as president ends next May.

Bessent said in an in-depth review released earlier this year that massive bond purchases during the pandemic have worsened inequality by boosting the stock market, without bringing notable benefits to the economy.

Other critics have long argued that the Fed continued to implement these purchases for too long, keeping interest rates low even as inflation began to soar in late 2021. The Fed stopped the purchases starting in 2021, then sharply increased borrowing costs to combat inflation.

“In hindsight, we could have — and perhaps should have — stopped the asset purchases sooner,” Powell said. “Our real-time decisions were intended to serve as insurance against downside risk.”

Still, Powell said that acting sooner would not have prevented the COVID-era surge in inflation: “Stopping earlier might have made some difference, but not enough to fundamentally change the trajectory of the economy. »

Powell also said the purchases were aimed at avoiding a breakdown in the market for Treasury securities, which could have pushed interest rates much higher.

The Fed chairman also discussed a decision by a bipartisan group of senators to block the central bank from paying interest on cash reserves that banks park at the Fed. A measure to prevent the Fed from doing so was defeated in the Senate last week by a lopsided vote of 83-14.

Nonetheless, he garnered bipartisan support, including Republican Senators Rand Paul of Kentucky and Ted Cruz of Texas, as well as Democratic Massachusetts Senator Elizabeth Warren.

Powell said that without the ability to pay interest on reserves, the Fed would “lose control of rates” and would not be able to carry out its mission. The Fed raises the short-term interest rate it controls when it wants to curb borrowing and spending and slow inflation, while it cuts the rate to encourage borrowing, growth and hiring.