Powell's 'hawkish' remarks… U.S. probability of a December rate hold 9%→70%

Fed, policy rate cut 0.25%P

"Quantitative tightening ends in December"

Two consecutive cuts to annual 4.0%

Preemptive response to signs of slowing employment

"Will end net runoff of securities holdings"

"There are internal differences of opinion on further cuts"

Unexpected remarks increase expectations of a hold

10-year Treasury yield rises to the annual 4% range

The U.S. central bank (Fed) at the Federal Open Market Committee (FOMC) on the 29th (local time) cut the policy rate by 0.25% points as expected. However, Chair Jerome Powell cooled market sentiment by saying, "A December rate cut is not a foregone conclusion." The market had initially expected a December rate cut, but Powell's remarks were interpreted as "hawkish" (favoring tighter policy), and the probability of a December rate hold rose to over 70%.

No decision made on the December meeting

In its statement, the FOMC said, "We decided to lower the target range for the federal funds rate by 0.25% points to 3.75–4.0%." It explained the background by saying, "Downside risks to employment have increased in recent months."

Powell also said at the press conference, "The labor market is clearly cooling, and downside risks to employment have increased in recent months." He noted, "Since earlier this year, the pace of job gains has noticeably slowed," and added, "Much of this slowdown appears to reflect weakening labor supply due to low immigration and lower labor force participation, but labor demand has clearly weakened as well."

Normally, when Powell expresses this level of concern about growth risks, the market responds positively expecting further rate cuts, but this time it was different. Powell drew a line under expectations for a December rate cut.

Powell said, "An additional cut at the December (FOMC) meeting is not a foregone conclusion," and "It is important to be clear on that point." He added, "The key is that no decision has been made yet regarding December."

Market sees possibility of a rate hike too

Powell's unexpected hawkish remarks doused the market's hopes for additional cuts within the year. The Dow and the S&P 500 opened sharply higher on optimism about the artificial intelligence (AI) boom, but most of the gains were given back after Powell's remarks were interpreted as hawkish.

According to the Chicago Mercantile Exchange (CME) FedWatch, as of 3 p.m. Korea time on the 30th, rate futures reflected a 70.4% chance of holding rates in December. That jumped from an initial 9.1%. There was even a 29.6% view that rates would be raised in December.

Government bond yields reacted immediately. The 10-year U.S. Treasury yield rose to 4.08% at the close of the New York market, up 0.09 percentage points from the previous session, entering the 4% range. The 2-year U.S. Treasury yield, which is sensitive to Fed policy, jumped 0.10 percentage points to 3.60% at the same time.

Powell said, "We have cumulatively cut by 1.5% points over the past year, and current rates are within many estimates of the neutral rate," adding, "So there has been growing talk of taking a pause in the cycle."

Quantitative tightening to end in December

Powell announced that "the net runoff of securities holdings (quantitative tightening) will end as of December 1." This is interpreted as a measure to respond to slowing growth and rising employment risks. He explained, "Maturing agency securities will not be reinvested; their proceeds will be reinvested in short-term Treasury bills to shorten the portfolio's average maturity and, over the long term, convert the balance sheet into one centered on Treasury securities."

This means that when agency bonds such as mortgage-backed securities (MBS) held by the Fed mature, the proceeds will not be used to buy the same assets, thereby absorbing liquidity from the market. In particular, Powell's announcement to shift into short-term Treasury bills is seen as an intention to shorten the average maturity of holdings to recover liquidity more quickly and to reconfigure the asset composition into a simpler, safer, Treasury-centered structure.

On the inflationary impact of tariffs, he reaffirmed the existing view that tariffs are assumed to have a one-off effect on price increases. Even so, excluding tariff effects, inflation would likely not have been much higher than the Fed's 2% price-stability goal.

Regarding the recent AI investment boom, he said it is different from the dotcom bubble. Unlike the dotcom era, he argued that firms currently under debate for being overvalued have actual profits and business models. Powell said, "AI-related investment in data centers and equipment is indeed a major pillar of growth, but consumption accounts for a much larger share of the U.S. economy," and "U.S. consumption is continuing, particularly among higher-income households."

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