Powell Says December Rate Cut May Not Happen

The US Federal Reserve has implemented a quarter-point reduction in interest rates, marking a continued effort to navigate towards a neutral policy stance amid evolving economic pressures. This move, accompanied by the decision to cease shrinking its balance sheet from 1 December, reflects a proactive response to signs of tightening liquidity in financial markets. Policymakers, however, emphasise that this adjustment serves primarily as insurance against potential downside risks in employment, particularly as official data flows are disrupted by the ongoing government shutdown.

Jerome Powell, the Fed chair, underscored the uncertainty surrounding the December policy meeting, stating that a further rate cut remains far from a foregone conclusion. With strongly differing views among committee members, the path forward hinges on incoming economic indicators, including labour market trends that suggest a gradual cooling without abrupt deterioration. Even without comprehensive government statistics, Powell indicated that significant shifts in the economy would be detectable through alternative channels. This data-dependent approach highlights the Fed's vigilance on inflation dynamics, including upward pressures on goods prices attributed to tariffs, which could complicate the outlook.

The announcement also addresses balance sheet management, with the $6.6 trillion portfolio set to stabilise, providing markets time to adjust. Analysts view this as the path of least resistance, balancing the benefits of ongoing quantitative tightening against the risks of excessive liquidity constraints. As the Fed enters a period of limited visibility into key metrics like October inflation and unemployment—likely unavailable for the December 9-10 meeting—expectations centre on maintaining a risk-management mode, potentially delivering another modest cut if downside pressures intensify. For global capital markets, these developments signal a Fed prioritising stability over aggressive easing, with implications for borrowing costs and asset valuations in the near term.