Powell backed the Fed’s rate cut, saying job market weakness outweighs inflation concerns

Federal Reserve Chair Jerome Powell said on Tuesday that the job market is looking weaker than expected, and that’s why he made the Federal Reserve’s first interest rate cut of 2025.

Speaking in Providence, Rhode Island, Powell explained that the Federal Open Market Committee (FOMC) decided to reduce the benchmark interest rate because risks to employment are growing faster than inflation threats.

“Near-term risks to inflation are tilted to the upside and risks to employment to the downside – a challenging situation,” Powell said during his speech to a group of business leaders. He made it clear that there’s no perfect choice in the current setup: “Two-sided risks mean that there is no risk-free path.”

The statement followed last week’s quarter-point rate cut, which was made despite inflation still hovering above the Fed’s 2% target. Powell described the current moment as one where the Fed needs to “balance both sides of our dual mandate.”

He said the committee’s focus right now is making sure price pressures don’t spiral while preventing the labor market from collapsing any further. The rate decision happened as both hiring and job openings are slowing down, and tariffs continue to push prices up.

Powell highlights jobs slowdown, floats more possible cuts

Powell pointed out that the labor market has “a marked slowdown” in both supply and demand. “In this less dynamic and somewhat softer labor market, the downside risks to employment have risen,” he said. That slowdown is already showing up in the numbers.

Over the summer, average payroll growth dropped to under 30,000 jobs per month, a dramatic fall. Even worse, earlier estimates were revised, showing that nearly one million fewer jobs were added in the year leading up to March 2025 than originally thought.

Though inflation isn’t where the Fed wants it, Powell said the recent data shows a sharp drop since the peak in 2022. But it’s still above target. He said the upcoming Commerce Department release is expected to show consumer prices rose 2.7% over the past year, and 2.9% if you leave out food and energy.

Adding to that mess is the return of President Donald Trump’s tariffs, which are creating new waves of price hikes. Trump is still locked in negotiations with top U.S. trade partners, and a key deadline with China is coming in early November.

Fed economists, for now, are calling the tariff effects temporary, but Powell wasn’t exactly confident. “Uncertainty around the path of inflation remains high,” he warned. “We will carefully assess and manage the risk of higher and more persistent inflation. We will make sure that this one-time increase in prices does not become an ongoing inflation problem.”

If economic conditions demand it, more rate cuts are still possible. “This policy stance, which I see as still modestly restrictive, leaves us well positioned to respond to potential economic developments,” Powell said.

Powell warns stocks are pricey but plays down risk to stability

During a Q&A after the speech, Powell was asked about how the Fed looks at asset prices, especially now that equities keep hitting all-time highs. He didn’t dodge.

“We do look at overall financial conditions, and we ask ourselves whether our policies are affecting financial conditions in a way that is what we’re trying to achieve,” he said. Then came the part that made Wall Street nervous: “By many measures, for example, equity prices are fairly highly valued.”

After Powell’s remarks, stocks fell. Major indexes, which had been gaining ground after the rate cut, all dropped into negative territory as traders reacted.

Despite the warning, Powell said the Fed doesn’t see major red flags just yet. “This is not a time of elevated financial stability risks,” he said. But he made it clear that the Fed is paying attention. Since the Fed’s actual move, stocks continued to break records, until Powell opened his mouth.

“Markets listen to us and follow and they make an estimation of where they think rates are going. And so they’ll price things in,” he said when asked about mortgage rates and financial expectations.

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