Fed Turns on the Liquidity Faucet as Powell Signals Neutral: Why Markets Smell a Year-End Rally

Federal Reserve Chair Jerome Powell struck a carefully balanced but ultimately market-friendly tone during his post-meeting press conference on Wednesday, reinforcing that policy is now operating “in a plausible range of neutral,” even as the central bank keeps a watchful eye on inflation risks and a gradually cooling labor market. Coming on the heels of the Fed’s widely expected 25-basis-point rate cut and its surprise move to begin buying short-term Treasury bills, Powell’s remarks helped cement the view that financial conditions are easing in a controlled way—an environment that markets interpreted as supportive rather than restrictive. Small caps, in particular, responded favorably, with investors leaning into the combination of improving liquidity and steady economic momentum.

On monetary policy, Powell repeatedly emphasized that the Federal Open Market Committee is no longer operating from a clearly restrictive stance. “We’ve been moving in the direction of neutral, and now we’re in the high end of the range of neutral,” he said, framing recent rate cuts as normalization rather than stimulus. Importantly, Powell pushed back firmly against any notion that a rate hike is part of the near-term outlook. “I don’t think a rate hike is anyone’s base case,” he said plainly, adding that policymakers see a range of views on whether to hold, cut once more, or stay on pause—but not tighten. That clarity helped Treasury yields move lower during the press conference as markets priced out residual tightening risk.

Powell was equally deliberate in setting expectations for further rate cuts. While the Fed added the phrase “extent and timing” to its guidance on future adjustments, Powell stressed that there is “no preset course” and that everything remains meeting-by-meeting and data-dependent. January policy decisions remain unresolved, he said, noting that officials will receive “a great deal of data” before then. The message was one of conditional patience: additional cuts remain possible, but they will not be rushed. Still, Powell acknowledged that with downside risks to employment having risen, the balance of risks has clearly shifted from earlier in the year.

Inflation commentary remained cautious but noticeably calmer than in past cycles. Powell said inflation has come in “a touch lower,” with growing evidence that services inflation is easing and that the recent pickup in goods inflation is “entirely due to tariffs.” He reiterated that tariff-driven inflation is still viewed as a one-time price increase rather than the start of a sustained inflationary cycle, though he acknowledged the risk that it could become more persistent if it embeds itself in wages and expectations. Market-based measures of inflation compensation, he said, are “at very comfortable levels” beyond the very short term, and surveys continue to show that long-term inflation expectations remain anchored near the Fed’s 2% target. “Everyone should understand that we will deliver 2% inflation,” Powell said.

On the economy more broadly, Powell painted a picture of continued resilience. He described the U.S. economy as “extraordinary,” adding that the baseline expectation for next year is for a pickup in growth. Consumer spending remains solid, business fixed investment is expanding, and spending on AI infrastructure is helping support capital expenditures. At the same time, Powell acknowledged that the labor market has softened more than earlier in the year, with job gains slowing, labor demand clearly easing, and labor supply coming down sharply. He noted that payroll growth may even be slightly negative on a monthly basis once statistical overcounting is corrected for—a sign of cooling, but not collapse.

Importantly, Powell stressed that the Fed does not want its policy actions to push job creation meaningfully lower. “We don’t want to push down on job creation with our policy,” he said, emphasizing that labor market downside risks now carry significant weight in the policy calculus. Still, he also made clear that inflation cannot be ignored simply to protect employment, describing the current environment as a “unique situation with tension between our two goals.” In short, both sides of the mandate are active constraints.

Housing remained one of the weakest spots in Powell’s commentary. He acknowledged that the housing market continues to face “significant challenges” and that affordability remains deeply strained. However, he also emphasized that tools to address the housing shortage largely fall outside the Fed’s authority. A quarter-point rate cut, he said, is unlikely to materially change housing affordability in the near term, underscoring that structural supply issues—not just interest rates—are driving the problem.

The most technically important—and market-moving—portion of Powell’s remarks centered on the Fed’s balance sheet and its plan to buy short-term Treasury securities. Powell explained that reserve balances reached “ample levels” slightly faster than expected as the Fed wound down quantitative tightening. To ensure smooth market functioning through seasonal pressures—particularly around tax season in April—the Fed will front-load reserve-management purchases over the next few months. The initial round will total roughly $40 billion in Treasury bills, with purchases expected to decline thereafter. The goal, Powell stressed, is purely operational: maintaining effective control over short-term interest rates and ensuring that reserves grow in line with the overall economy. This is not QE in the traditional sense, but it is a clear liquidity injection into the financial system.

Markets treated that liquidity shift as the most bullish takeaway of the entire event. Equity indices moved higher, Treasury yields fell at the front end, and small-cap stocks emerged as notable outperformers, reflecting their sensitivity to easing financial conditions. The Russell 2000 surged as investors rotated into more cyclically sensitive names.

That backdrop led to a widely shared market observation from Ryan Detrick of Carson Group, who wrote on social media: “Hawkish cut? Dovish cut? Does it matter? I don’t think so, as history says cuts near all-time highs aren’t bearish and that is what really matters. The past 22 times the Fed cut near ATHs saw the S&P 500 higher a year later 22 times. Don’t fight the Fed and more cuts are coming. $IWM +1.85% near highs at $256 as Powell speech ends.” The historical resonance of that statistic only reinforced the market’s constructive interpretation.

Taken together, Powell’s press conference reinforced a narrative that is quietly supportive for risk assets. Policy is no longer distinctly restrictive. Inflation is easing outside of tariff-related distortions. Labor market risks are rising, but from a position of strength. Growth expectations remain firm. And most critically for markets, the Fed is now actively managing liquidity to avoid unintended tightening in money markets.

The combination of gradual rate normalization and renewed system liquidity is exactly the mix that historically sustains late-cycle rallies rather than ends them. While Powell made clear that there is “no risk-free policy path,” the overarching tone of the press conference pointed to steadiness, flexibility, and a Fed that is intent on landing the economy gently rather than forcing a slowdown. As markets digested that message, the favorable reaction across equities—especially in small caps—sent a clear signal: for now, momentum and liquidity remain aligned in favor of a constructive year-end setup.