As the policy meeting on November 7 approaches, the Federal Reserve has entered another quiet period, with the market generally expecting a 25 basis point rate cut. Analysts believe that the September PCE inflation report and the October employment report will not change the Fed's decision-making path. Deutsche Bank economist Matthew Luzzetti pointed out that although the data may influence decisions, officials may not waver this year, with the probability of a rate cut reaching 95.7%
As the policy meeting on November 7 approaches, Federal Reserve officials have once again entered a blackout period. The market generally believes that there is a high possibility of a 25 basis point rate cut.
Based on the speeches of Federal Reserve officials in the past six weeks, economists generally expect that the Fed will cut interest rates by 25 basis points, adjusting the rate range to 4.5%-4.75%. Despite the release of key data such as the September PCE inflation report and the October employment report before the rate cut, analysts believe that these data will not change the Fed's decision-making path.
Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank in New York, stated:
"In other circumstances, data might influence their decision, but this year, officials may not waver."
The theme of the data is "slowing down," with an expected gradual 25 basis point rate cut
Luzzetti stated that most Federal Reserve officials advocate for a cautious or gradual pace of rate cuts, "The signal we are getting from Fed officials is generally 'a 25 basis point rate cut'," Tim Duy, Chief Economist at SGH Macro Advisors, also agrees with this view.
Pricing in the federal funds futures market shows that the market has almost fully priced in the expectation of a 25 basis point rate cut. Investors expect a 95.7% probability that the Fed will announce a 25 basis point rate cut after the meeting.
Regarding the upcoming data releases, analysts believe that policymakers' comments indicate that there is a significant consensus on the theme of the upcoming data.
Luzzetti mentioned:
"The focus remains on maintaining a strong labor market while keeping inflation growing moderately. Whether it's inflation or the labor market, the theme of the data is 'continuing slowdown'."
Federal Reserve officials also believe that the labor market is slowing down and state that their policy rate is still "restrictive" or "demand-constraining". However, due to two destructive hurricanes hitting the Southeast, analysts expect that the October employment data will be chaotic and may not be very informative. Duy also stated, "I don't think they will be very sensitive to the next employment report."
Kathy Bostjancic, Chief Economist at Nationwide, expects an increase of 100,000 jobs in October (after deducting a decrease of 36,000 jobs due to the Boeing strike and 60,000 job losses due to hurricanes), consistent with the median forecast of economists surveyed by The Wall Street Journal.
A 50 basis point rate cut is "unlikely," with another 25 basis point cut in December
In September, the Fed ultimately cut rates by 50 basis points. However, before the meeting, the market expected officials to cut rates by 25 basis points. Reports from the Financial Times and The Wall Street Journal stated that choosing between a 25 basis point cut and a 50 basis point cut was "very tricky". In the end, the Fed opted for the more aggressive 50 basis point rate cut Will the "reversal" of September be repeated this time? Economists' answer is: It is "unlikely" that the Federal Reserve will cut interest rates by 50 basis points again, as a series of data released since the last meeting have been stronger than expected. Lindsey Piegza, Chief Economist at Stifel Financial, stated, "Wage data is stronger than expected, consumer data is stronger than expected. Inflation is also exceeding expectations."
However, they also believe that the Federal Reserve is unlikely to pause its rate-cutting actions. Kevin Burgett, economist at LH Meyers, said:
"No one is advocating not cutting rates at the upcoming meeting, but advocating for a more gradual approach to rate cuts."
It is worth noting that Federal Reserve officials will also receive the results of the U.S. presidential election on November 5th before the meeting. However, Luzzetti stated that he does not believe the presidential election will change the Federal Reserve's plan to cut rates by 25 basis points on November 7th, saying, "Any impact of the new government on the economy will not be evident until 2025."
Economists unanimously believe that the path for the Federal Reserve after November will become more difficult, as continued strong economic reports will raise doubts about how "strict" the Federal Reserve's policy is. Duy stated that the Federal Reserve's economic forecasts indicate they will cut rates by another 25 basis points in December, and the Federal Reserve will make decisions based on data.
Currently, federal funds futures data show a 22.3% probability of pausing rate cuts in December. Piegza of Stifel stated that she does not rule out the possibility of data influencing Federal Reserve decisions:
"I think 50 basis points are no longer under consideration, 25 basis points is the base case, but if the employment report is significantly stronger, coupled with PCE inflation, it may push the needle to pause the rate cut in November."