Fed’s Powell suggests tightening program could end soon, opens door to rate cuts
U.S. Federal Reserve Chairman Jerome Powell at a press conference following the Federal Open Market Committee (FOMC) meeting on Wednesday, September 17, 2025 in Washington, DC, USA.
Kent Nishimura | Bloomberg | Getty Images
On Tuesday, Fed Chairman Jerome Powell suggested the central bank was approaching a point where it would stop reducing its bond holdings and offered few hints that further rate cuts were possible.
Speaking at the National Association for Business Economics conference in Philadelphia, Powell offered a thesis on where the Fed stands on “quantitative tightening,” or its effort to reduce the more than $6 trillion in securities it holds on its balance sheet.
Although he did not give an exact date for when the program would end, he said there were signs that the Fed was approaching its goal of “ample” reserves for banks.
“Our long-declared plan is to halt the balance sheet flow when reserves are slightly above the level we consider to be consistent with adequate reserve conditions,” Powell said in prepared remarks. “We may approach that point in the coming months and we are closely monitoring a wide range of indicators to inform that decision.”
On interest rates, the central bank governor did not provide specific guidance on a lower path, but comments on the weakness in the labor market suggested that easing was firmly on the table, as financial markets expected.
“If we move too quickly, we may leave the inflation job unfinished and have to go back and finish it later. If we move too slowly, there may be unnecessary losses, painful losses in the employment market. Therefore, we are in a difficult position to balance these two things,” he said.
“The data we had immediately following the July meeting showed that the labor market had actually softened quite a bit, putting us in a situation where the two risks were closer to balance,” Powell said. he added.
Other Fed officials have recently said the falling labor market is top of mind in their thinking, leading to the possibility of additional rate cuts down the road.
balance sheet math
But Powell focused most of his speech on the Fed’s holdings of Treasuries and mortgage-backed securities.
While balance sheet questions may be unimportant for monetary policy, they are important for financial markets.
When financial conditions are tight, the Fed targets “ample” reserves so banks can access liquidity and keep the economy afloat. As conditions change, the Fed aims for “abundant” reserves, a step that would prevent too much capital from being thrown into the system.
During the Covid pandemic, the central bank has aggressively purchased Treasuries and mortgage-backed securities, pushing the balance sheet to close to $9 trillion.
Since mid-2022, the Fed has been gradually allowing the income due on these securities to be removed from the balance sheet, effectively tightening one pillar of monetary policy. The real question was how far should the Fed go, and Powell’s comments suggest the end is near.
He noted that “some signs of a gradual tightening of liquidity conditions are starting to emerge” and could signal that further reductions in reserves could hinder growth. However, he also said that the Fed has no plans to return to its pre-Covid balance sheet size, which was close to $4 trillion.
On a related topic, Powell noted concerns about the Fed continuing to pay interest on bank reserves.
The Fed normally remits the interest it earns on its holdings to the Treasury general fund. However, it suffered operating losses due to having to raise interest rates so quickly to control inflation. Congressional leaders such as Sen. Ted Cruz, R-Texas, have suggested halting payments to the reserves.
But Powell said that would be a mistake and would hinder the Fed’s ability to conduct policy.
“Although our net interest income is temporarily negative due to the rapid increase in policy interest rates to control inflation, this is highly unusual. Our net income will soon turn positive again, as it has throughout our history,” he said. “If our ability to pay interest on reserves and other obligations is eliminated, the Fed loses control over interest rates.”
Views on the economy
On the larger issue of interest rates, Powell generally stuck to the latter scenario; That is, policymakers are concerned that the labor market is tightening and disrupting the risk balance between employment and inflation.
“While the unemployment rate remained low through August, payroll increases slowed sharply, likely due in part to a decline in labor force growth due in part to immigration and lower labor force participation,” he said. “In this less dynamic and somewhat softer labor market, downside risks to employment appear to have increased.”
Powell noted that the Federal Open Market Committee responded to the situation with a quarter-point cut in the federal funds rate in September. While markets expected two more rate cuts this year and many Fed officials recently supported this view, Powell did not agree with this view.
“There is no risk-free path for policy as we navigate the tension between our employment and inflation targets,” he said.
The Fed has been hampered somewhat by the government shutdown and its impact on economic data. Policymakers rely on metrics such as the nonfarm payroll report, retail sales and various price indices to make their decisions.
Powell said the Fed continues to analyze conditions based on available data.
“Based on the data we have available, it is fair to say that the outlook for employment and inflation has not changed much since our September meeting four weeks ago,” Powell said. “However, data obtained before the lockdown suggests that growth in economic activity may be on a slightly firmer path than expected.”
The Bureau of Labor Statistics said it is recalling workers to prepare its monthly consumer price index report, which will be released next week.
Powell said available data shows that commodity prices are rising, and that the increase is largely a function of tariffs rather than underlying inflation pressures.
