Federal Reserve Chair Jerome Powell suggested Tuesday that the central bank may be nearing the end of its quantitative tightening program, while also leaving the door open to additional interest rate cuts as the labor market shows signs of softening.
Balance Sheet Runoff Nearing Its End
Speaking at the National Association for Business Economics conference in Philadelphia, Powell said the Fed is approaching its target for "ample" reserves in the banking system. Since mid-2022, the Fed has been shrinking its balance sheet—once nearly $9 trillion at the height of the pandemic—by allowing Treasurys and mortgage-backed securities to roll off.
Powell noted that liquidity conditions are tightening and further reductions could risk slowing growth. While he did not provide a specific end date, he emphasized that the Fed is "closely monitoring a wide range of indicators" and may stop balance sheet runoff in the coming months. Importantly, Powell ruled out returning to the pre-Covid balance sheet size of about $4 trillion, signaling that the Fed will maintain a larger footprint in financial markets than before the pandemic.
Interest Rates: Balancing Inflation and Jobs
On rates, Powell struck a cautious tone. He acknowledged that the Fed faces a delicate balancing act: moving too quickly on cuts could leave inflation unfinished, while moving too slowly risks "painful losses" in the labor market.
Recent data, he said, shows the labor market has "softened pretty considerably," with payroll gains slowing and participation rates declining. That shift has brought the risks of inflation and unemployment closer to balance, raising the likelihood of further easing.
The Fed already cut rates by a quarter point in September, and markets expect at least two more reductions this year. Powell, however, stopped short of confirming that path, saying there is "no risk-free option" as policymakers weigh competing goals.
Political and Policy Crosscurrents
Powell also addressed concerns about the Fed’s practice of paying interest on bank reserves, which has drawn criticism from some lawmakers. He defended the policy, warning that eliminating it would undermine the Fed’s ability to control rates.
The Fed has faced operating losses due to higher interest payments, but Powell said those losses are temporary and net income will soon turn positive again.
Economic Outlook
Despite the government shutdown delaying some key data releases, Powell said the Fed’s outlook for employment and inflation has not changed significantly since its September meeting. He noted that growth may be on a "somewhat firmer trajectory" than expected, while goods price increases appear tied more to tariffs than underlying inflation pressures.
The Bureau of Labor Statistics has recalled staff to prepare the next consumer price index (CPI) report, due next week, which will provide a clearer picture of inflation trends.
The Bottom Line
Powell’s remarks suggest the Fed is preparing to wind down quantitative tightening and is increasingly focused on supporting a labor market that is losing steam. While the timing of future rate cuts remains uncertain, markets are betting that easing is coming sooner rather than later. For investors, the message is clear: the Fed’s tightening cycle is nearly over, and the next phase of policy could be about cushioning growth rather than restraining it.