Fed Chair Jerome Powell threw cold water on investor hopes for another interest rate cut in December, stressing that the Federal Open Market Committee remains deeply divided and that the road ahead is clouded by data gaps and conflicting risks between the central bank’s objectives.
Speaking after the central bank lowered rates by 25 basis points to 3.75%-4.00% for the second straight meeting, Powell cautioned that another cut is “not a foregone conclusion—far from it,” pushing back against expectations that had built up across financial markets in recent weeks.
Markets Rethink December Odds
Following Powell's comments, CME FedWatch data showed a sharp repricing in December expectations. The probability of the Fed holding rates steady jumped to 12%, up from just 1% the previous day.
Investors had been nearly certain of a third straight cut amid slowing growth and moderate inflation.
Powell said the committee’s debate showed "strongly differing views about how to proceed," noting that some policymakers remain more focused on upside inflation risks, while others are increasingly concerned about labor market softness.
“We haven’t made a decision for December,” Powell stated.
Shutdown Data Gaps Complicate the Picture
With the ongoing U.S. government shutdown limiting the release of key statistics, Powell warned the Fed may need to be more cautious.
"If you're driving in the fog, you slow down," he said, referring to the lack of complete data. "We won't have the detailed feel of things. If uncertainty is high, that could be an argument for caution."
Recent inflation data, such as the September Consumer Price Index, came in slightly softer than expected, though Powell noted tariff-driven price pressures in goods could lift inflation temporarily.
"We've now moved 150 basis points closer to neutral than we were a year ago," Powell said, referring to the estimated 3%-4% range for the neutral rate. This level neither stimulates nor restricts economic activity.
Powell suggested that some Committee members believe interest rates may have already reached an appropriate level.
“I think for some part of the Committee, it is time to maybe take a step back and see whether there really are downside risks to the labor market.”
QT Phase-Out Starts December
Powell confirmed the Fed will halt the reduction of its balance sheet — quantitative tightening — on Dec. 1, freezing the size at about $6.6 trillion. Mortgage-backed securities will be reinvested into Treasury bills, shortening the duration of Fed holdings.
He said this transition reflects the system approaching an "ample reserves" level and a desire to align the balance sheet more closely with the maturity structure of outstanding Treasury debt.
"We didn't see a lot of benefit to squeezing out the last few dollars of runoff," Powell said. "The system is tightening organically, and this gives markets time to adapt."
AI Spending Surge Not Rate-Driven, Powell Says
Responding to a question about whether an easier monetary policy will further fuel the already booming artificial intelligence infrastructure boom, Powell said the current wave of data center construction is unlikely to be interest-rate-sensitive.
"These investments are based on longer-term views about productivity and future demand, not 20 basis points of interest savings," he said. "They're not particularly interest-sensitive compared to other sectors."
On whether equity markets are overheating, Powell said the Fed doesn't judge valuations directly but focuses on systemic risks.
"It's a mixed picture, but not an overly troubling one," he said, pointing to well-capitalized banks and generally healthy household balance sheets. Some areas, such as subprime auto loans, show stress, but broader financial conditions appear stable.
Markets Flip To The Red
Powell's comments turned the stock market negative, with major equity indexes reversing earlier gains and slipping into the red by late afternoon trading in New York.
The S&P 500 — tracked by the Vanguard S&P 500 ETF (NYSE:VOO) — fell 0.2% to 6,878 at 3:30 p.m. ET, pulling back from a new intraday high of 6,920 set earlier in the session.
Interest-rate-sensitive sectors led the decline, with the Real Estate Select Sector SPDR Fund (NYSE:XLRE) down 2.9% and the Financials Select Sector SPDR Fund (NYSE:XLF) down 1.9%.
While the Nasdaq 100 managed to hold onto a 0.3% gain, the small-cap Russell 2000 dropped sharply, falling more than 1%.
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