Powell Signals Policy Shift: Balance Sheet Reduction May Stop in Months, October Rate Cut Expectations Rise
On October 15, 2023, in the early hours of Beijing time, Federal Reserve Chairman Powell spoke at the annual meeting of the National Association for Business Economics in Philadelphia, releasing a dual policy signal indicating that the balance sheet reduction process is nearing its end, and that there is a high probability of a rate cut in October, drawing widespread market attention.
In his speech, Powell specifically mentioned that the Federal Reserve may stop its more than three-year-long balance sheet reduction (i.e., quantitative tightening, QT) plan in the coming months.
Since the balance sheet reduction began in June 2022, the Federal Reserve's balance sheet size has decreased from nearly $9 trillion at its peak to about $6.6 trillion currently, while current market liquidity has shown signs of tightening, such as stabilizing repo rates and short-term pressures at specific points in time.
Stopping the balance sheet reduction is undoubtedly a significant boon for the market, meaning the Federal Reserve's "draining" actions will come to an end, easing expectations of tight liquidity in the financial system, which will support risk assets such as stocks, especially benefiting interest-sensitive technology growth stocks and the cryptocurrency market.
Although Powell mentioned that the current inflation rate is still slightly above the long-term target of 2%, he emphasized that the downside risks in the labor market are rising. Even though the official employment data for September was delayed due to the government shutdown, indicators from the private sector and internal Federal Reserve research show that hiring and layoffs are maintaining low levels, and households' perceptions of job opportunities and businesses' perceptions of hiring difficulties are continuing to decline.
This statement echoes the minutes from the September meeting. At that time, the majority of Federal Reserve officials planned to implement two more rate cuts within the year due to weak employment expectations, and a 25 basis point cut was completed in September 2025. Currently, the CME FedWatch Tool shows that the market's expectation probability for a 25 basis point rate cut in October has reached 95.7%.
Right now, the market's attention is focused on the September Consumer Price Index (CPI) data to be released on October 24. If this CPI data does not show an unexpected rebound, it will further strengthen the decision-making basis for a rate cut at the end of the month.
Analysts point out that whether it is the liquidity easing signal released by stopping the balance sheet reduction or the concerns about employment risks reinforcing rate cut expectations, both indicate that the Federal Reserve's monetary policy is shifting from a tightening cycle to a neutral or slightly easing direction, which will inject stability into the global financial markets.