Powell Flashes Red Light to Stocks: Valuations High, October Rate Cut Not Guaranteed

TradingKey - Even though the updated Summary of Economic Projections from the September policy meeting suggests two more rate cuts this year, recent comments from Federal Reserve officials indicate they are reluctant to commit to further easing in the coming months. Reiterating that there is no risk-free path for monetary policy, Fed Chair Jerome Powell has now sounded a warning on elevated stock valuations.

Speaking Tuesday (September 23) in Rhode, Powell said that despite restarting rate cuts last week, the Fed still faces challenges in balancing its dual mandate of price stability and maximum employment. Policymakers may face a difficult road ahead when considering additional rate cuts.

“Near-term risks to inflation are tilted to the upside and risks to employment to the downside — a challenging situation. Two-sided risks mean that there is no risk-free path,” Powell said.

Notably, Powell did not signal his stance on a potential October rate cut, leaving markets guessing.

For months, the expectation of Fed rate cuts has been a key driver behind the record-breaking rally in U.S. stocks. What hit equity investors particularly hard was Powell’s latest commentary on stock market valuations.

Powell stated that by many measures — including stock prices — current valuations are “fairly highly valued.”

On Tuesday, all three major U.S. indices reversed midday gains and closed lower, with the Nasdaq falling about 1%, after having set new highs for three consecutive days the previous session.

Board economists said Powell’s caution against overly aggressive easing highlights growing divisions within the Fed, and this internal divergence itself has become a market catalyst, increasing uncertainty around the pace of the easing cycle.

However, some analysts argue that Powell didn’t say anything truly new — he was simply trying to balance political pressure from the White House, which is strongly pushing for faster cuts, without committing to an aggressive easing path.