Powell signals neutral policy stance as non tariff driven inflation fades

Fed Chair Powell tapped the brakes on expectations for continued easing, noting that the policy rate is now within a plausible range of neutral. Throughout the press conference, he repeatedly emphasized that the Fed is “well-positioned” on policy, inflation, and the labor market—language suggesting confidence in the current stance. While Powell acknowledged that upside risks to inflation remain, he highlighted that service inflation continues to soften and that most of the recent pickup in goods inflation is entirely due to tariffs.

He added that without these tariff effects, inflation would already be near the Fed’s 2% target, and that tariffs appear to represent a one-time price level adjustment, not an ongoing source of inflation pressure. Together, these comments imply that, absent new tariff increases, inflation should gradually drift back toward target over time.

The chance for in an April cut moved up from the low 50% to about 60%. The chance for a June cut is around 87%.

Below is a summary of his comments by topic.

Monetary Policy Stance & Rate Path

• Policy rate now in a plausible range of neutral.

• Committee is well-positioned to determine whether further adjustments are needed.

• No preset path — decisions made meeting by meeting.

• “There is no risk-free policy path.”

• When inflation and employment risks are equally balanced, policy should sit around neutral.

• Some members feel the Fed should hold, others want to cut once or more.

• Powell: “I could make the case for either side.”

• A rate cut is not the base case; opinions are split but balanced.

• Broad support for today’s decision.

• Effects of prior cuts are only beginning to show.

• Haven’t made a decision on January.

• Front-loading Treasury purchases to get through tax season.

Labor Market Conditions

• Layoffs and hiring remain low, but labor demand has softened.

• September data: unemployment edged up, job gains slowed significantly.

• Labor market now less dynamic and somewhat softer.

• Downside risks to employment have risen.

• Expectation: payrolls running at about –20,000 per month.

• Labor market cooling more gradually than expected.

• Labor supply has come down sharply.

• Risk of job creation turning negative must be monitored closely.

• Powell does not expect a sharp downturn in employment with rates in current range.

• “People care a lot about the labor market.”

• Does not want policy to push down on job creation.

• AI impact on layoffs still early days, not showing in data yet.

Inflation Dynamics

• Inflation remains somewhat elevated.

• Very few inflation reports since October meeting.

• Recent readings: goods inflation picked up; services disinflation continued.

• Underlying inflation still shows mixed signals.

• Near-term inflation risks tilted to the upside due to goods prices.

• Evidence growing that services inflation has moderated.

• Goods inflation now entirely driven by tariffs.

• Progress seen this year on non-tariff inflation.

• If tariffs were removed, inflation would be in the low 2s.

• Expect that tariffs create one-time price increases—but risk exists that this is not true.

• Powell: “Everyone should understand we will deliver 2% inflation.”

Economic Activity & Growth

• Consumer spending remains solid.

• Business fixed investment continues expanding, supported by AI-related spending.

• Effects of the government shutdown should be offset by stronger growth next quarter.

• Baseline expectation: solid growth next year.

• Strong spending on AI data centers persists.

• Shutdown-affected data (CPI, household survey) may be distorted, requiring caution.

• “We’ll get a great deal of data before the January meeting.”

• Powell stresses Fed is well-positioned to wait for more clarity.

Housing & Real Estate

• Housing sector remains weak.

• A quarter-point rate cut may not materially improve affordability.

• Long-standing housing supply shortage is the core issue.

• Fed tools cannot solve structural supply shortages.

Risks & Uncertainty

• Downside risks to employment have increased.

• Upside risks to inflation remain.

• “Our two goals are a bit in tension.”

• The Fed must evaluate incoming data very carefully.

• Household survey and CPI could appear unusually high or distorted due to missing October/November data.

• Policymaker projections are not a plan, and carry higher uncertainty.

Balance Sheet & Liquidity

Internal Committee Dynamics

• Discussions are thoughtful and respectful despite strong differences of opinion.

• Members broadly agree inflation is too high and the labor market has softened.

• Differences lie in weighing inflation risk vs. employment risk.

• There was fairly broad support for today’s decision.

Productivity & AI

• Seeing signs of a positive productivity shock.

• AI could materially lift productivity in the years ahead.

• Higher productivity theoretically supports higher GDP growth with stable employment.

• If productivity averages ~2%, the economy can grow faster without overheating.

• Higher productivity would imply a higher neutral rate, but “not all things are equal.”

Tariffs & Supply Dynamics

• Goods inflation entirely due to tariffs, not demand.

• If tariffs were removed, inflation would fall into the low 2% range.

• Tariffs considered a one-time price shock, but data must confirm this.

Bid

• Powell wants to hand the next Chair an economy in good shape — strong labor market and inflation under control.

• When asked about staying on the Board after his term ends, Powell said he has nothing new to share.