U.S. central bank cuts policy rate by 0.25 percentage point…Powell "Inflation still high" [Fed Watch]

Powell: "Tariffs are a one-off price shock

Stay vigilant to achieve the 2% target"

Resuming short-term Treasury purchases to respond to 'reserve balance reductions'

$40 billion supplied in the first month

The U.S. central bank (the Fed) on the 10th (local time) cut its policy rate by 0.25 percentage point to 3.50~3.75%. Despite some recent official employment indicators being released with delays, the Fed said that, based on a compilation of private and public data, employment and inflation prospects have "not changed materially" since October. The labor market is gradually cooling, and inflation is still above the target.

Federal Reserve Chair Jerome Powell said at a press conference immediately after the Federal Open Market Committee (FOMC) meeting that "we decided to lower rates taking into account the balance of risks to the labor market and inflation," and added, "price increases from tariffs are likely a one-off shock, but we cannot leave that to become persistent inflation."

Powell explained that even without official updates to employment indicators, "both layoffs and hiring are stabilizing at low levels, and household job-search difficulties and firms' perception of hiring difficulties have also declined."

The official September employment report showed the unemployment rate rose slightly to 4.4%, and the pace of job growth has clearly slowed compared with earlier this year. He noted, "As labor supply growth slows, labor market dynamism has weakened overall," and "the downside risks to employment have increased in recent months."

Although inflation has fallen substantially from last year's peak, it still exceeds the 2% target. As of September, PCE inflation was up 2.8% year-on-year, and core PCE also rose 2.8%, remaining higher than earlier this year. This is interpreted as partly due to goods prices rising again because of tariffs. By contrast, disinflation continues in the services sector.

According to the Summary of Economic Projections (SEP) released by the Fed, the median PCE inflation forecast for this year is 2.9%, and 2.4% next year, slightly lower than in September. The unemployment rate is projected to follow a path that falls slightly from 4.5% this year.

Powell emphasized, "There is no risk-free path for policy," and said, "Tariffs are, in essence, a one-off upward pressure on price levels, and our duty is not to let that become recurrent inflation."

He noted that rates have been cut by a total of 0.75 percentage point over the last three meetings, saying, "The normalization of policy stance will help stabilize the labor market and, after the tariff effects fade, contribute to inflation moving back toward the 2% goal."

The median fed funds rate projection presented in the SEP is 3.4% for 2026 and 3.1% for 2027, unchanged from September. Powell underlined, "These are the projections of individual members, and Fed policy will be decided at each meeting."

The Fed said at the meeting that reserve balances have reached the lower end of the 'ample' range and decided to resume purchases of short-term Treasury bills (T-bills). The aim is to supply reserves and prevent short-term rates from moving outside the policy rate range.

According to the New York Fed, the size of purchases in the first month will be $40 billion and may remain elevated for several months. The pace of purchases will be adjusted based on market conditions. The Fed also said it will remove the standing repo limit for controlling short-term rates to help smooth market functioning.

New York=Park Shin-young, correspondent nyusos@hankyung.com