What to Watch This Afternoon at the Federal Reserve: Powell, Policy, and the Final Mile to Neutral

Markets head into this afternoon’s Federal Reserve decision with a rare combination of confidence and fragility. Confidence, because a 25-basis-point rate cut is widely expected. Fragility, because the Federal Open Market Committee is now operating in the most difficult phase of the cycle: the handoff from restrictive policy toward neutral, with inflation no longer surging but not yet fully conquered, and with labor market downside risks quietly rising. Today’s press conference from Jerome Powell will be scrutinized not for what the Fed does—but for what it says about how much room is left to ease.

Powell’s October 29 press appearance established the framework guiding today’s debate. Inflation, in his words, has eased materially from the 2022 peak, yet remains “somewhat elevated” versus the Fed’s 2% target. Headline and core PCE were both running near 2.8% year-over-year at the time, placing inflation progress firmly in the “improving but unfinished” category. Importantly, Powell flagged a divergence under the surface: goods inflation has reaccelerated due to tariffs, reversing a long-standing deflationary trend, while services inflation—especially housing services—has continued to cool. Non-housing services remain sticky, although Powell emphasized that part of that pressure reflects asset-linked nonmarket components rather than pure demand.

The tariffs narrative will be closely watched this afternoon. In October, Powell framed tariff inflation as more likely a one-time level shift than a self-sustaining inflation regime. That characterization matters enormously for markets. A one-off price adjustment allows the Fed to keep cutting cautiously. A persistent feed-through into wages and expectations would force a reassessment of the entire easing path. Powell explicitly warned of that risk in October—but said it was not yet occurring. Whether he strengthens or softens that warning today could be one of the most important signals of the press conference.

On the labor market side, Powell’s tone has quietly shifted over the past several meetings. The message in October was that the labor market is cooling—but not collapsing. Job growth has slowed sharply from earlier in the year. Layoffs and hiring remain low based on private data. Job openings have stabilized at subdued levels. Most notably, Powell argued that the deceleration in job growth is being driven primarily by shrinking labor supply, not collapsing demand. Lower immigration and declining participation were cited as the dominant structural forces. The unemployment rate, at roughly 4.3%, remains historically low—but Powell acknowledged that downside risks to employment have increased.

One of his more striking October comments received less attention at the time: he described true job creation as “close to zero” when adjusted for estimated government overcounting. That remark reframed the labor narrative from “cooling” to “flatlining.” Whether Powell revisits or intensifies that framing today will heavily influence bond and equity reactions, especially rate-sensitive assets.

Against that backdrop, monetary policy has entered what Powell called a “risk management” phase. In October, the Fed cut the funds rate by 25 basis points, bringing policy to what Powell described as “meaningfully less restrictive,” but still not accommodative. The pivot was not presented as the start of an automatic easing campaign. Instead, the Fed emphasized that risks are now explicitly two-sided—upside risks to inflation and downside risks to employment. December, Powell said at the time, was “far from a foregone conclusion.”

Today’s meeting again tests whether that language holds. One watch item will be whether Powell continues to emphasize “risk management” or begins to frame the policy path as a more clearly defined normalization cycle. The internal split on the Committee also matters. October featured dissents on both sides—one member favoring a 50-basis-point cut, another preferring no cut at all. Any commentary today that hints at rising or falling internal disagreement will shape expectations for 2026.

The balance sheet is no longer a policy wildcard—but it remains an underappreciated one. In October, Powell formally announced the end of quantitative tightening as of December 1, concluding roughly $2.2 trillion in runoff over 3.5 years. As a share of GDP, the Fed’s balance sheet has fallen from roughly 35% to about 21%. That decision was driven less by the economic outlook and more by plumbing issues: repo pressures, the fed funds rate creeping above IORB, and heavier usage of the standing repo facility. MBS runoff will continue, with reinvestment shifting into Treasury bills. Powell also acknowledged that reserves will eventually need to grow again with the economy—though the timing is unresolved. Markets will listen for any follow-up color on whether the Fed views today’s reserve levels as comfortably “ample,” or merely temporarily adequate.

Growth and data quality also loom large this afternoon. Powell noted in October that GDP growth has slowed to 1.6% from 2.4% last year, with consumer spending and business investment holding up better than expected while housing remains weak. He also acknowledged severe data blind spots caused by the government shutdown, forcing the Fed to rely on alternative sources such as ADP, private price trackers, and Beige Book surveys. His “driving in fog” analogy captured the uncertainty facing policymakers. If Powell repeats that metaphor today, markets will take it as a signal that policy caution remains the dominant bias.

On financial conditions and markets, Powell dismissed comparisons to the late-1990s tech bubble, arguing that today’s AI and data-center investment boom is underpinned by real earnings and cash flow. He also stated that this capex wave is not especially interest-rate sensitive—an important implication for the durability of the AI trade even in a higher-for-longer world. At the same time, he acknowledged a bifurcated economy, with higher-income households continuing to spend while lower-income consumers grow more fragile. Subprime auto stress is rising but not yet systemic. Powell declined to comment directly on equity valuations.

The central question for this afternoon is whether Powell’s forward guidance hardens into a pause signal—or softens into a clearer easing glide path. In October, he emphasized that December would depend heavily on incoming inflation and labor data. If government data remain impaired, he suggested the Fed would move more cautiously rather than accelerate cuts. At the same time, he reaffirmed full commitment to returning inflation to 2% while protecting labor market stability—a dual mandate that becomes harder to balance as rates approach neutral.

Bottom line: the Fed is no longer operating in a clearly dovish regime. Inflation progress is real but fragile. Labor market downside risks are increasing. Policy is no longer restrictive in the same way it was a year ago—but it is not yet comfortably neutral either. This is the most delicate stretch of the cycle.

Today’s press conference is less about the rate cut itself and more about the Fed’s confidence in the final mile. Does Powell lean into the inflation risks again? Does he elevate labor fragility? Does “risk management” remain the guiding principle, or does the easing narrative become more mechanical? The answers will determine not only how markets react today—but how they price the entire 2026 policy path.