The Federal Reserve is poised to ease policy again, Fed Chair Jerome Powell signaled this week, telling officials and markets that a quarter-point cut later this month remains the base case even as a partial government shutdown has constrained the central bank’s ability to read the economy. Powell also indicated the Fed may pause or slow the runoff of its balance sheet "in the months ahead," comments that reinforced expectations of a more accommodative stance.

Powell’s remarks came as labor-market measures showed signs of cooling. While the job market has been historically tight, hiring momentum has softened from the blistering pace seen during the recovery from the pandemic. Economists note that payroll growth and hiring surveys have moderated, and some firms report more cautious hiring plans — developments that make further reductions in the federal funds rate more plausible without immediately stoking inflation.

The shutdown, however, has complicated the picture. Several federal data releases were delayed or curtailed, limiting the Fed’s usual monthly inputs such as certain surveys and administrative data. That reduced transparency means policymakers are relying more on lagging indicators and market signals — a shift that markets interpret as both a catalyst for cuts and a source of risk. "When data flows thin, central banks lean more on financial-market pricing and staff judgment, and that raises uncertainty about the precision of any policy switch," said a senior economist who follows the Fed.

Markets responded quickly. Treasury yields fell and futures markets increased the odds of a rate cut, while equities rallied on relief that policy was likely to ease. Fixed-income traders also took Powell’s comment about the balance sheet as a sign the Fed could soon halt quantitative tightening, an action that would remove an additional tightening force from financial conditions.

The policy shift reflects a broader transition for the Fed. After an aggressive tightening campaign to tame inflation, the central bank has pivoted toward easing as inflation has persisted in moderating and growth has cooled. A 25-basis-point cut would mark another step in that adjustment, but Powell’s acknowledgment of murky data and the potential balance-sheet pause underscore how finely balanced the decision remains.

There are immediate and longer-term implications. In the near term, rate cuts and a pause in shrinking the Fed’s balance sheet would likely bring relief to borrowers, lower mortgage and corporate borrowing costs modestly, and support equity valuations. Over the longer term, a return to easier policy risks rekindling price pressures if the labor market re-tightens or if wage growth accelerates. Policymakers will be weighing that trade-off as they monitor incoming inflation metrics once normal data flows resume.

As the Fed prepares for its next meeting, the key question for investors and policymakers is not whether a cut will happen — Powell has signaled it likely will — but how the Fed will manage the trade-offs amid limited data, shifting market expectations and the perennial challenge of timing its moves without reigniting inflation.