Fed Speak – Powell warns of two-way risks to the US economy

24 Sep 2025 , 11:08 AM

RISKS ARE BOTH WAYS, BUT DOWNSIDE RISK IS HIGHER

Any speech by Jerome Powell is of interest to global markets. This is the first time Jerome Powell has spoken since the Fed had cut rates by 25 bps in September 2025. Since the start of 2025, the Fed chair opted to hold rates despite pressure from the US President to cut rates. Powell had maintained his stance that the inflation risk was too high and the tariff impact was too uncertain. Hence, status quo had been his response.

The first signs of change were visible at Jackson Hole in August. That was the first time Powell indicated that risks to growth and jobs were becoming more prominent than inflation risk. In sync with that view, FOMC cut rates by 25 bps in September policy. The recent speech by Jerome Powell at the Greater Providence Chamber of Commerce, Rhode Island; was his first public debate after the first rate cut in 2025.

SPEAKS ABOUT MACRO OUTLOOK, SKIPS RATES TRAJECTORY

In his speech, Powell was forthright that the balance of risks had shifted in favour of weak growth and weak jobs; compared to the risk of higher inflation. The dual risks are still there and that puts the Fed in an unenviable position. They have to constantly balance between cutting too much and cutting too little. As a result, Powell has not provided any outlook for the rates trajectory, barring the dot-plot of the FOMC members that is already available.

However, where the markets and CME Fedwatch may have got it wrong is that Powell has emphasized that the imbalance between jobs and inflation was very marginal. Hence, it may not call for an aggressive rate cut program as projected by CME Fedwatch. It is likely that the Fed may hold back after its September rate cut, and take further action based on data flows. Powell has clarified that future trajectory of monetary policy would be data-driven.

SOME CONCERNS OVER GDP GROWTH RATE

For the first half of 2025, US GDP expanded by just 1.5%. This was due to a marginal contraction in the March quarter, followed by a sharp 3.3% expansion in the June quarter. However, as Powell as emphasized in the past, GDP contraction in Q1 must be taken with a pinch of salt. The tariff threat had led to most American businesses front-loading their imports to skirt the higher tariffs proposed.

Imports being a negative force on the GDP, let to contraction. However, Powell had rightly estimated that growth would turn around in the second quarter. There are some concerns on the consumer demand front, which actually justified the rate cut in September. What will really be critical is the actual impact of tariffs on GDP growth and whether it is a one-time impact or a sustained impact.

UNEMPLOYMENT MAY BE SLIGHTLY MORE COMPLICATED

According to Jerome Powell, there has been a marked slowdown in the demand and supply of labour. That was one reason, the jobs impact was mellowed. Companies are not recruiting aggressively, but they are also not laying off. In August, rate of unemployment edged up to 4.3%. On a long-term basis, it is still under control, but has gone up by nearly 100 bps in the last couple of years. The bigger concern is that the average monthly payroll additions are down to just 29,000. Historically monthly accretion of 1,00,000 workers has kept labour market in equilibrium. It remains to be seen how this dichotomy plays out in the coming months. Labour supply has been hit by the curbs imposed on immigrants, and that has actually kept labour markets in balance.

INFLATION WAS THE LESSER OF TWO EVILS

It would be naïve to believe that inflation is not an issue for the Fed. It is just that the gravity of inflation is relatively less compared to unemployment. Headline inflation may be down sharply since the highs of 2022, but it is 80 bps to 90 bps higher than the Fed equilibrium target of 2% inflation. Also, much of the pressure is coming from core inflation, which tends to be stickier. In addition, it is still not clear if the impact of tariffs on inflation would be a one-time spike or a sustained spike. That remains the X-factor. What has prevented inflation from spiralling is the sustained disinflation in services, including housing.

HOW WILL THE MACROS IMPACT US MONETARY POLICY?

Monetary policy has to contend with this dual risk; where risks to inflation are tilted to the upside and risks to employment to the downside. For now, the focus is on the lesser of the two evils, but the Fed could face a situation wherein both factors could deteriorate. The rate cut in September can be justified on the grounds that the downside risk to jobs looks to be more acute than the upside risks to inflation. Also, the policy was still fairly restrictive, and hence, some movement towards the neutral rate was justifiable. From here on, the focus would shift entirely to growth, jobs and inflation data flows.