Jerome Powell, chairman of the US Federal Reserve, during a news conference following a Federal Open Market Committee (FOMC) meeting in Washington, DC, US, on Wednesday, Sept. 17, 2025.
Kent Nishimura | Bloomberg | Getty Images
Federal Reserve Chair Jerome Powell on Tuesday suggested the central bank is nearing a point where it will stop reducing the size of its bond holdings, and provided a few hints that more interest rate cuts are in the cards.
Speaking to the National Association for Business Economics conference in Philadelphia, Powell delivered 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 offered 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.
Other Fed officials have said recently that the falling labor market is taking precedence in their thinking, leading to the likelihood of additional rate cuts ahead.
Balance sheet math
Powell, though, centered most of his speech on the Fed’s holdings of Treasurys and mortgage-backed securities.
Though balance sheet questions are in the weeds for monetary policy, they matter to financial markets.
When financial conditions are tight, the Fed aims for “abundant” reserves so that banks have access to liquidity and can keep the economy running. As conditions change, the Fed aims for “ample” reserves, a step down that prevents too much capital from sloshing around the system.
During the Covid pandemic, the central bank had aggressively purchased Treasurys and mortgage-backed securities, swelling the balance sheet to close to $9 trillion.
Since mid-2022, the Fed has been gradually allowing maturing proceeds of those securities to roll off the balance sheet, effectively tightening one leg of monetary policy. The question had been how far the Fed needed to go, and Powell’s comments indicate that the end is close.
He noted that “some signs have begun to emerge that liquidity conditions are gradually tightening” and could be signaling that reducing reserves further would hinder growth. However, he also said the Fed has no plans to go back to its pre-Covid balance sheet size, which was closer to $4 trillion.
On a related matter, Powell noted concerns over the Fed continuing to pay interest on bank reserves.
The Fed normally remits interest it earns from its holdings to the Treasury general fund. However, because it had to raise interest rates so quickly to control inflation, it has seen operating losses. Congressional leaders such as Sen. Ted Cruz, R-Texas, have suggested terminating the payments on reserves.
However, Powell said that would be a mistake and would hinder the Fed’s ability to carry out policy.
“While our net interest income has temporarily been negative due to the rapid rise in policy rates to control inflation, this is highly unusual. Our net income will soon turn positive again, as it typically has been throughout our history,” he said. “If our ability to pay interest on reserves and other liabilities were eliminated, the Fed would lose control over rates.”
Views on the economy
On the larger issue of interest rates, Powell generally stuck to the recent script, namely that policymakers are concerned that the labor market is tightening and skewing the balance of risks between employment and inflation.
“While the unemployment rate remained low through August, payroll gains have slowed sharply, likely in part due to a decline in labor force growth due to lower immigration and labor force participation,” he said. “In this less dynamic and somewhat softer labor market, the downside risks to employment appear to have risen.”
Powell noted that the Federal Open Market Committee responded in September to the situation with a quarter percentage point reduction on the federal funds rate. While markets strongly expect two more cuts this year, and several Fed officials recently have endorsed that view, Powell was noncommittal.
“There is no risk-free path for policy as we navigate the tension between our employment and inflation goals,” he said.
The Fed has been hampered somewhat by the government shutdown and the impact it has had on economic data releases. Policymakers rely on metrics like the nonfarm payrolls report, retail sales and various price indexes to make their decisions.
Powell said the Fed is continuing to analyze conditions based on the data that is available.
“Based on the data that we do have, it is fair to say that the outlook for employment and inflation does not appear to have changed much since our September meeting four weeks ago,” Powell said. “Data available prior to the shutdown, however, show that growth in economic activity may be on a somewhat firmer trajectory than expected.”
The Bureau of Labor Statistics has said it has called workers back to prepare the monthly consumer price index report, which will be released next week.
Powell said available data has showed that goods prices have increased, largely a function of tariffs rather than underlying inflation pressures.
