Powell Tilts Dovish as Jobs Soften and Balance Sheet Nears Endgame

Federal Reserve Chair Jerome Powell struck a dovish tone in his October 14 address to the National Association for Business Economics, balancing familiar caution about inflation with a new emphasis on employment risks and balance sheet management. While reiterating the Fed’s dual mandate and commitment to data dependency, Powell’s remarks leaned more heavily toward concerns about a cooling labor market—signaling a subtle but meaningful pivot in the central bank’s policy bias. His comments also hinted that the Fed may soon conclude its balance sheet unwind, a development that buoyed rate-sensitive sectors like homebuilders and kept market expectations firmly priced for a 25-basis-point rate cut later this month. According to CME FedWatch data , futures now imply a 97% probability of that move.

Powell opened by reaffirming that the Fed’s current policy stance remains appropriately restrictive but increasingly balanced between inflation and employment risks. “There is no risk-free path for monetary policy,” he noted, emphasizing that recent data point to an economy that is stronger than expected but a job market that has softened considerably. Payroll growth has slowed, and Powell conceded that the breakeven rate of job creation—the level needed to maintain stable unemployment—has fallen significantly. “The labor market has demonstrated significant downside risk,” he said, acknowledging that further declines in job openings could start to push unemployment higher.

That acknowledgment marked one of the most dovish elements of the speech. The Fed’s focus for nearly two years has been on curbing inflation, but Powell’s remarks suggested growing concern that restrictive policy could soon tip the balance too far. He described the current labor environment as “low-hire, low-fire”—an equilibrium that signals a loss of momentum rather than overheating. The message was that the central bank sees diminishing returns from keeping rates elevated, particularly as inflation progress continues and price pressures are now being driven by tariffs and supply factors rather than demand.

Indeed, Powell explicitly tied the recent uptick in inflation to tariff-related effects rather than broad wage or demand pressures. Core PCE inflation remains at 2.9%, with housing costs cooling and long-term inflation expectations stable. He cautioned, however, that the slow pass-through of tariffs could begin to look more persistent if supply chains fail to adjust, creating tension in the data. The statement aligned with market interpretations that tariff-induced inflation is unlikely to derail the Fed’s easing trajectory.

The balance sheet discussion represented the other dovish shift. Powell confirmed that the Fed is “approaching the end” of its balance sheet runoff, potentially in the coming months. He explained that reserves remain “abundant” and that halting the quantitative tightening process while reserves are still “somewhat above ample” would maintain market stability. This marks the first explicit signal from Powell that the Fed is preparing to stop its balance sheet contraction—a significant departure from prior guidance that emphasized patience and continuation. He also said officials will soon discuss the composition of assets, reaffirming the long-run goal of a Treasury-only portfolio.

Markets immediately picked up on the signal. Treasury yields dipped, with the 10-year note falling roughly one basis point to 4.04%, while gold moved higher and equities reversed early losses. Homebuilder stocks rallied broadly on the prospect of a less aggressive runoff of mortgage-backed securities. Powell reiterated that the Fed “would not use MBS purchases to address mortgage rates directly,” but the implication of balance sheet stability was enough to ease housing-related tightening pressures.

Powell also touched on the broader economic landscape, noting that growth data before the government shutdown pointed to firmer-than-expected activity, creating “tension with the labor market data.” He acknowledged that the Fed has “other data sources” to monitor conditions should official releases be delayed. On AI, Powell briefly remarked that it is “too early” to judge productivity effects and that the range of potential outcomes remains wide—an acknowledgment of technological uncertainty, but one with little immediate policy bearing.

The chair reiterated that the Fed’s decisions will continue to be driven by data and evolving risk assessments rather than preset plans. “Consensus is great,” Powell quipped, “but more important is to get the right policy decision.” The phrasing reflected a careful balancing act: the Fed is not declaring victory on inflation, but it is signaling confidence that the hardest part of the fight is behind it.

The speech’s market implications were clear. The dovish tilt—anchored by the twin themes of labor softness and balance sheet caution—reassured investors that the Fed’s next move remains a cut. With inflation steady, tariffs viewed as temporary, and the job market losing steam, Powell’s tone suggested a central bank pivoting from restriction toward stabilization. For markets, that means lower yields, firmer risk appetite, and continued strength in housing-related equities.

Ultimately, Powell’s remarks framed a Fed entering its post-hike phase: flexible, data-driven, and increasingly focused on sustaining employment without reigniting inflation. The message was not one of urgency but of readiness—a signal that, absent an inflation surprise, the next move is down.