MNI FED WATCH: Well-Positioned To Wait On More Cuts In 2026

Federal Reserve Chair Jerome Powell signaled Wednesday the U.S. central bank is taking a more cautious stance toward additional monetary easing to start 2026, after lowering benchmark interest rates by a third straight quarter-point in response to weakening labor market conditions.   

"The adjustments since September bring our policy within neutral," Powell said. "We haven't made any decision about January, but we think we are well positioned to wait and see how the economy performs." 

The job market continues to lose steam, with the unemployment rate up three-tenths between June and September to 4.4%, he noted. Hiring averaging 40,000 per month since April may actually be a negative 20,000 per month after expected revisions from the Bureau of Labor Statistics, as immigration curbs are also felt on the supply of workers, he said. 

"Surveys of households and businesses both showed declines in supply and demand for workers, so I think you could say the labor market has continued to cool gradually, maybe a touch more gradual than we thought."

A TOUCH LOWER

Meanwhile, tariff-related increases in goods prices are masking somewhat lower underlying inflation pressures, Powell said. 

"The evidence is kind of growing that what is happening here is services inflation coming down, and that is offset by increases in goods, and that goods inflation is entirely in sectors where there are tariffs," he said. 

With wage growth also cooler, "It doesn't feel like the hot economy that wants to generate a Phillips Curve kind of inflation," he said. 

Assuming there are no new tariff announcements, goods inflation from tariffs should peak in the first quarter or so, he said. "From here it shouldn't be big. It could be a couple tenths or even less than that," he said. Fed economists estimate roughly nine months for tariffs to flow through the economy, "then you should see that coming down in the back half of next year." 

Though headline PCE inflation has risen to 2.8% in September, the latest month for which data are available, from a low of 2.3% in April, and most FOMC members continue to see risks to the upside, a rate hike is nobody's base case at this point, Powell said. 

"When people are writing down their estimates of policy and where it should go, it is either holding here, or cutting a little or cutting more than a little." 

Six FOMC members had preferred no cut this month and three no cut next year, according to the latest set of projections. (See: MNI: Fed Dots To Show 1-2 Rate Cuts Next Year - Ex-Officials) Three voting members dissented against Wednesday's cut, the most since 2019.

ASSET PURCHASES

The FOMC also surprised markets Wednesday by announcing an immediate return to Treasury bills purchases to bolster the supply of reserves in the banking system. 

The federal funds rate and other money market rates began to tick higher in September, "so we knew this was going to come. When it finally did come, it came a little quicker than expected," Powell said. 

The purchases which will start at USD40 billion a month to build a buffer against April Tax Day inflows, will likely fall to around USD20 billion to USD25 billion per month to keep pace with the growth of liabilities, he said. 

"That is completely separate from monetary policy, we just need to keep an ample supply of reserves out there."