Powell signals policy shift in NABE speech

Powell signals QT wind-down and flags growing labor market risks 

• The Fed appears on track to end balance sheet runoff in the coming months, with Federal Reserve Chair Powell signaling that reserves are “somewhat above the level we judge consistent with ample reserve conditions.”
   
• Powell highlighted “significant downside risks” to the labor market alongside softening sentiment data – confirming a likely fed funds rate cut at the end-of-October Federal Open Market Committee (FOMC) meeting.
   
• We anticipate back-to-back Fed easing in October and December and a further 50 basis points (bps) of rate cuts in 2026. We believe the FOMC will likely end its quantitative easing program in December and adjust its balance sheet reinvestments toward shorter-duration Treasury securities.

Federal Reserve Chair Powell used his National Association for Business Economics (NABE) speech to signal that the quantitative tightening (QT) clock is ticking. He noted that reserves may soon be judged “ample enough,” citing “some signs that liquidity conditions are gradually tightening, including a general firming of repo rates along with more noticeable but temporary pressures on selected dates.” His remark that “we may approach that point in coming months” suggests the FOMC is preparing to halt runoff sooner rather than later.

While Powell reaffirmed confidence in the Fed’s liquidity backstops — namely the standing repo facility and discount window — his tone was unmistakably cautious. The risk of unintended market stress, reminiscent of the 2019 repo episode, is front of mind.

Attention is now shifting to what comes after QT. Powell flagged that the Fed’s portfolio is currently “overweight” on longer-term securities and “underweight” on shorter-term securities, a duration skew that could prompt a change in reinvestment strategy. Powell emphasized that the transition will be “gradual and predictable,” with an aim to avoid market disruption.

On the macro front, Powell reiterated that “there is no risk-free path for policy,” while acknowledging that the labor market is softening. He cited “significant downside risks” to employment and noted that both business and household sentiment has weakened. On the inflation front, he noted that goods price increases remain closely tied to tariffs, not broader price pressures, even though shorter-term inflation expectations have nudged higher this year.

Powell also acknowledged the widening divergence of views within the FOMC, describing it as a natural reflection of today’s uncertain environment. “Consensus is great,” he said, “but the most important thing is to get it right.” With a more hawkish rotation of voting regional Fed presidents next year and a potentially more dovish Board of Governors, the policy debate is likely to intensify — raising the odds of two-sided dissents as the Committee navigates conflicting economic signals.