Powell’s Pause Could Be the Real Problem

Adam

Summary:

Powell signaled the Fed may now pause after ending QT and cutting rates, reflecting internal division and limited economic visibility. The writer expects no further cuts, slower growth, sticky inflation, and rising stagflation risks.

Jerome Powell has hinted that the Federal Reserve may now step back, and that hesitation could prove more consequential than any rate cut or hike.

After lowering the federal funds rate by 25 basis points and confirming that quantitative tightening will end on December 1, the Fed appears to have entered a holding phase.

Powell’s message was clear enough: another cut in December is “not a foregone conclusion.” That, to me, signals the end of this year’s easing cycle.

The likely pause reflects unease rather than control. I expect the United States to face a period where inflation remains high while job creation continues to weaken, the early signs of stagflation. Prices are persistent, wage growth is slowing, and sentiment is fading. The Fed, in my view, is cornered between its inflation fight and a softening economy.

Earlier this year, the central bank moved in relative harmony. That cohesion has broken down. The latest 10–2 vote showed deep divisions. Governor Stephen Miran argued for a larger 50-basis-point cut, while Kansas City Fed President Jeffrey Schmid opposed cutting at all. It is clear that the Fed no longer shares a common view.

This division will, I believe, lead to caution rather than boldness. If policymakers cut again, they risk reigniting inflation. If they hold, they risk an economic stall. My forecast is that they will choose to pause, meaning no further cuts in 2025.

The timing complicates everything. The government shutdown has suspended the release of vital data on employment, retail sales, and inflation. That leaves the Fed with partial visibility. Central banks without reliable information tend to move slowly. Powell’s tone reflected that uncertainty.

Ending quantitative tightening reinforces the sense of caution. QT has already removed more than $2 trillion from the balance sheet since 2022.

Ending it now is, in my opinion, a defensive move aimed at stabilising liquidity, not stimulating growth. Funding pressures were building, and the Fed chose to prevent further strain.

This policy adjustment will, I expect, ripple through global markets. US Dollar liquidity defines much of the world’s financial structure, and when the Fed halts its balance-sheet reduction, other central banks pay attention. Even if they do not follow the same path, they are likely to soften their approach to reflect the Fed’s tone.

Domestically, the economic backdrop remains fragile. Inflation, still near 3%, continues to exceed the Fed’s comfort level. The labour market is cooling, and the trend in job creation points downward.

These are not signs of collapse, but they suggest a grinding slowdown that could evolve into stagflation if momentum continues to fade.

The risk is that policymakers begin relying on optimism instead of data. Hope that inflation will ease without intervention. Hope that employment will recover naturally. Hope that liquidity support alone can calm markets. Hope is not an economic strategy.

The next few months, in my view, will test Powell’s credibility more than any period since the post-pandemic tightening cycle began. Inflation is likely to remain stubborn. Employment may weaken further. Market volatility could rise as investors react to mixed signals from a divided central bank.

For investors, this is a time to focus on positioning rather than prediction. QT may be ending, but that does not mean liquidity will expand meaningfully. Growth is slowing, and policy coordination is fading. The Fed has little space to act decisively.

My outlook for the remainder of 2025 is straightforward: no additional rate cuts, inflation that stays elevated, and further softening in the jobs market. These are the conditions that could edge the United States toward a mild form of stagflation.

Powell’s caution is understandable for many. The Fed is managing competing pressures with limited visibility.

Source: investing

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