Slowing US hiring suggests economy still needs rate cuts, Fed’s Powell says

WASHINGTON (AP) — A sharp slowdown in hiring poses a growing risk to the U.S. economy, Federal Reserve Chair Jerome Powell said Tuesday, a sign that the Fed will likely cut its key interest rate twice more this year.

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

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

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

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

Economists said Powell’s comments solidified expectations for further rate cuts, starting at his next meeting on October 28-29.

“While there was little doubt that (the Federal Reserve) was willing to cut rates at its next meeting, today’s comments were a strong confirmation of that expectation,” Michael Feroli, JPMorgan Chase’s chief U.S. economist, said in a note to clients.

Powell also said the central bank could soon stop reducing its roughly $6.6 trillion balance sheet. The Federal Reserve has been allowing about $40 billion in Treasury bonds and mortgage-backed securities to mature each month without replacing them.

“We may get closer to that point in the coming months,” Powell said.

The change could reduce borrowing costs slightly 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 Federal Reserve’s practice of purchasing longer-term Treasuries and mortgage-backed securities in 2020 and 2021, with the goal of lowering longer-term interest rates and supporting the economy during the pandemic.

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

Bessent said in a lengthy critique published earlier this year that huge bond purchases during the pandemic worsened inequality by boosting the stock market, without providing notable benefits to the economy.

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

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

However, Powell said acting sooner would not have prevented the COVID-era inflation spike: “Stopping it sooner might have made some difference, but not enough to fundamentally alter the trajectory of the economy.”

Powell also said the purchases were aimed at preventing a collapse in the Treasury securities market, which could have sent interest rates much higher.

The Federal Reserve chairman also referred to a measure taken by a bipartisan group of senators to prevent the central bank from paying interest on cash reserves that banks deposit with the Federal Reserve. A measure to prevent the Federal Reserve from doing so was defeated in the Senate last week by a lopsided 83-14 vote.

Still, he won bipartisan support, including Republican Sens. Rand Paul of Kentucky and Ted Cruz of Texas, as well as Massachusetts Democratic Sen. Elizabeth Warren.

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