Federal Reserve Chair Jerome Powell has sent a clear and cautious message to markets: investors should not assume that a rate cut in December is a done deal. Despite growing market optimism following recent signs of cooling inflation and slower job growth, Powell emphasized that the Federal Reserve remains sharply divided on whether to continue cutting rates—or even pause further easing altogether.
“A further cut is not a foregone conclusion. Far from it,” Powell said during a policy forum in Washington, D.C., signaling that the Fed’s next move will hinge on data, not on market expectations. His remarks mark a deliberate effort to temper speculation after the central bank’s recent decision to lower the federal funds rate by 25 basis points, the first cut in nearly a year.
Market Euphoria Meets Central Bank Caution
Powell’s comments come amid a wave of investor enthusiasm that the U.S. economy is finally transitioning toward a “soft landing.” Equities have surged in recent weeks, Treasury yields have fallen, and futures markets have priced in a nearly 80% probability of another rate cut in December.
But Powell sought to cool those expectations, stressing that the Fed must be guided by “real progress” in bringing inflation sustainably down to its 2% target, not by market sentiment or political pressure. “We’ve made progress, yes, but we are not yet where we need to be,” he said.
His words sparked an immediate market reaction: bond yields edged higher, and the dollar strengthened as traders recalibrated their outlook on the pace of monetary easing heading into 2026.
A Deeply Divided Fed
Behind Powell’s cautious tone lies a policy committee increasingly split between two camps.
On one side, dovish members argue that with inflation steadily cooling and unemployment edging up, maintaining high rates for too long could risk tipping the economy into recession. They see room for further easing to support demand and cushion the labor market.
On the other side, hawkish policymakers warn that inflation’s retreat has been uneven and that core prices—particularly in services and housing—remain sticky. They believe that cutting rates too soon could reignite inflationary pressures, forcing the Fed into a damaging stop-and-go policy cycle.
Powell acknowledged this rift openly, saying, “The Committee is not of one mind on the pace or extent of additional policy adjustments. The risks are now more balanced—but they are still risks in both directions.”
Inflation: Progress, But Not Victory
While headline inflation has cooled from its 2022 highs, core inflation—which excludes volatile food and energy prices—remains above 3%. Some Fed officials worry that this stickiness could persist well into 2026, particularly if wage growth and consumer spending remain robust.
Recent data from the Commerce Department showed personal consumption expenditures (PCE) inflation at 2.7% year-over-year in September, down from 3.5% earlier this year but still above the Fed’s target.
Powell praised the progress but urged patience. “We’re encouraged by the direction of travel, but one or two months of favorable data do not make a trend. The last mile of inflation reduction tends to be the hardest.”
Labor Market Still Strong but Cooling
The U.S. labor market continues to show resilience, though signs of moderation are emerging. Job openings have declined from record highs, wage growth has slowed slightly, and layoffs have inched up in some sectors such as technology and finance.
Still, Powell noted that employment remains “remarkably strong” and that consumer spending has not yet shown a dramatic pullback. “We cannot claim that the economy is under strain,” he said. “That gives us the flexibility—but also the responsibility—to proceed carefully.”
The Fed’s dual mandate—to ensure maximum employment and price stability—remains at the core of its decision-making, Powell reiterated. He said policymakers will continue to assess whether the balance between those two objectives justifies more easing.
Markets Face a Reality Check
For months, investors have been betting that the Fed would deliver a series of rate cuts starting in December and continuing through mid-2026. Those expectations helped fuel a rally in stocks and corporate bonds, as traders priced in lower borrowing costs and a return to easier credit conditions.
Powell’s latest remarks, however, inject a note of uncertainty. Analysts now expect the Fed to “skip” a December cut unless inflation readings over the next two months come in significantly below expectations.
“Powell is reminding markets that the Fed’s credibility depends on not moving too fast,” said one senior economist at a major investment bank. “The central bank wants to avoid the perception that it’s responding to Wall Street rather than to data.”
Political and Global Pressures Mount
Powell’s warning also comes against a backdrop of political scrutiny and global economic headwinds. With a contentious U.S. election year approaching, the Fed faces renewed calls from some lawmakers to ease policy faster to support growth. Meanwhile, rising global uncertainties—from sluggish growth in China to renewed tensions in the Middle East—have complicated the inflation outlook.
Higher energy prices, volatile exchange rates, and supply disruptions could all reignite cost pressures, leaving the Fed with little room for error. “External shocks can reverse inflation gains quickly,” Powell cautioned. “That’s why we cannot declare victory prematurely.”
What Comes Next
All eyes are now on the next two monthly inflation reports and the November jobs data, which will likely determine whether the Fed proceeds with another cut or holds steady through the winter.
If inflation continues to ease and growth moderates, a December cut remains possible, though far from guaranteed. However, if data surprises on the upside—or if the labor market rebounds—the Fed could decide to pause and reassess in early 2026.
Powell concluded his remarks with a note of humility and resolve:
“We are navigating through uncertainty, and it demands caution. The path forward is not predetermined. What matters most is achieving our goals sustainably, not quickly.”
Conclusion
Jerome Powell’s latest message is a reality check for markets eager to declare the end of the tightening cycle. The Federal Reserve may have begun easing, but its leadership is clearly unwilling to move on autopilot.
The takeaway is clear: a December rate cut is possible—but far from certain. With inflation still above target and divisions deep within the Fed, policymakers are preparing to make one of the most consequential decisions of the post-pandemic economy.
For investors and businesses, that means one thing—uncertainty remains the only certainty in the months ahead.
