Fed's Powell suggests tightening program could end soon, opens door to rate cuts

Federal Reserve Chair Jerome Powell said the central bank is nearing a point where it will stop reducing the size of its bond holdings, but gave no long-run indication of where interest rates are heading.

Though balance sheet questions are in the weeds for monetary policy, they matter to financial markets.

Powell generally stuck to the recent script on the economy and interest rates that policymakers are concerned that the labor market is tightening and skewing the balance of risks between employment and inflation.

Speaking to the National Association for Business Economics conference in Philadelphia, Powell provided a dissertation on where the Fed stands with “quantitative tightening,” or the effort to reduce the more than $6 trillion of securities it holds on its balance sheet.

While he provided no specific date of when the program will cease, he said there are indications the Fed is nearing its goal of “ample” reserves available for banks.

“Our long-stated plan is to stop balance sheet runoff when reserves are somewhat above the level we judge consistent with ample reserve conditions,” Powell said in prepared remarks. “We may approach that point in coming months, and we are closely monitoring a wide range of indicators to inform this decision.”

On interest rates, the central bank chief did not provide specific guidance on a path lower, but comments about weakness in the labor market indicated that easing is firmly on the table, as financial markets expect.

“If we move too quickly, then we may leave the inflation job unfinished and have to come back later and finish it. If we move too slowly, there may be unnecessary losses, painful losses, in the employment market. So we’re in the difficult situation of balancing those two things,” he said.

“The data we got right after the July meeting showed that ... that the labor market has actually softened pretty considerably, and puts us in a situation where the two risks are closer to being in balance,” Powell added.