Key Points

Federal Reserve Chairman Jerome Powell stated that the central bank is approaching the point where it will stop reducing the size of its bond holdings, but did not provide long-term guidance on where interest rates are headed.

Although the balance issues are in the details of monetary policy, they are important for financial markets.

Powell largely adhered to the recent narrative regarding the economy and interest rates, that policymakers are concerned that the labor market is tightening and distorting the balance of risks between employment and inflation.

Jerome Powell, Chair of the Federal Reserve System, at a press conference following the Federal Open Market Committee (FOMC) meeting in Washington, D.C., U.S., on Wednesday, September 17, 2025.

Kent Nishimura | Bloomberg | Getty Images

Federal Reserve Chair Jerome Powell suggested on Tuesday that the central bank is nearing the moment when it will stop reducing the size of its bond holdings and gave some hints that further rate cuts are on the agenda.

Speaking at the National Association for Business Economics conference in Philadelphia, Powell provided a dissertation on where the Fed stands with "quantitative tightening," or the effort to reduce more than $6 trillion in securities it holds on its balance sheet.

While he did not provide a specific date for when the program would end, he said there are signs that the Fed is approaching its goal of "sufficient" reserves available to banks.

"Our plan, which we have long stated, is to end balance sheet reductions when reserves are slightly above the level we consider consistent with sufficient reserve conditions," Powell said in prepared remarks. "We may approach that point in the coming months, and we are closely monitoring a wide range of indicators to inform that decision."

Regarding interest rates, the head of the central bank did not provide specific guidance on cuts, but comments about weakness in the labor market suggest that easing is firmly on the agenda, as financial markets expect.

"If we move too quickly, we may leave the work on inflation unfinished and have to come back later and finish it. If we move too slowly, there could be unnecessary losses, painful losses in the labor market. So we are in a difficult situation, balancing these two things," he said.

"The data we received just after the July meeting showed that... the labor market has actually weakened significantly and puts us in a position where the two risks are closer to balance," Powell added.

Other Fed officials have recently stated that the weakening labor market looms large in their thinking, leading to the likelihood of additional rate cuts in the future.

Balance sheet math

Powell, however, focused much of his speech on the Fed's assets in Treasury securities and mortgage-backed securities.

While balance sheet issues are at the core of monetary policy, they are important for financial markets.

When financial conditions are tight, the Fed strives for "ample" reserves so that banks have access to liquidity and can keep the economy running. As conditions change, the Fed aims for "sufficient" reserves, which is a step down that prevents excess capital in the system.

During the Covid pandemic, the central bank aggressively purchased Treasury securities and mortgage-backed securities, increasing the size of its balance sheet to nearly $9 trillion.

Since mid-2022, the Fed has gradually allowed the maturing funds of these securities to roll off the balance sheet, effectively tightening one leg of monetary policy. The question was how far the Fed should go, and Powell's comments suggest that the end is near.

He noted that "some signs have begun to emerge that liquidity conditions are gradually tightening" and may signal that further reductions in reserves could hinder growth. However, he also said that the Fed does not plan to return to the size of its balance sheet prior to Covid, which was closer to $4 trillion.

On a related issue, Powell noted concerns about the Fed continuing to pay interest on bank reserves.

The Fed typically transfers the interest it earns on its assets to the general fund of the Treasury. However, as it had to raise interest rates so quickly to control inflation, it has faced operational losses. Congressional leaders, such as Senator Ted Cruz, R-Texas, have proposed halting payments on reserves.

However, Powell said that it would be a mistake and would hinder the Fed's ability to conduct policy.

"Although our net interest income was temporarily negative due to the rapid rise in interest rates to control inflation, this is extremely unusual. Our net income will soon be positive again, as it has typically been throughout our history," he said. "If our ability to pay interest on reserves and other obligations were removed, the Fed would lose control over rates."

Views on the economy

On the broader issue of interest rates, Powell largely stuck to the recent narrative that lawmakers are concerned that the labor market is tightening and distorting the balance of risks between employment and inflation.

"While the unemployment rate remained low until August, job gains have slowed sharply, likely partly due to reduced labor force growth from low immigration and labor force participation," he said. "In this less dynamic and somewhat softer labor market, it appears that risks to employment have increased."

Powell noted that the Federal Open Market Committee reacted to the situation in September by lowering the federal funds rate by a quarter percentage point. While markets heavily expect two more cuts this year, and several Fed officials have recently supported this view, Powell was noncommittal.

"There is no risk-free path for policy as we navigate the tension between our employment and inflation goals," he said.

The Fed has been somewhat constrained by the government shutdown and the impact it has had on the release of economic data. Policymakers rely on indicators such as the employment report, retail sales, and various price indices to make their decisions.

Powell said that the Fed continues to analyze conditions based on available data.

"Based on the data we have, it's fair to say that the forecasts for employment and inflation do not seem to have changed significantly since our September meeting four weeks ago," Powell said. "The data available before the close, however, shows that economic activity growth may be on a slightly firmer trajectory than expected."

The Bureau of Labor Statistics stated that it has called workers back to prepare the report on the monthly consumer price index, which will be released next week.

Powell said that the available data showed that prices for goods increased mainly due to tariffs, rather than inflationary pressures.