Nine days before Federal Reserve officials decide on interest rate adjustments, key employment and inflation data, as well as major events such as the U.S. presidential election, will influence their decision-making. Despite the market widely betting on a 25 basis point rate cut, recent data has shown strong performance, with consumer spending and job creation exceeding expectations. Federal Reserve officials were satisfied with the rate cut in September, and San Francisco Fed President Daly hinted at supporting further rate cuts to maintain economic health. Most officials believe that at least another percentage point rate cut is needed before reaching the long-term "neutral" level
Intelligent Finance APP noted that in the nine days before Federal Reserve officials sit down to decide on the next interest rate adjustment, a series of major events will shape their decision-making process - from key employment and inflation data to the intense U.S. presidential election.
However, it is currently unclear which of these factors may cause the Federal Reserve to deviate from its most likely next decision: to cut interest rates again to maintain the healthy development of the U.S. labor market and avoid an economic recession in the case of cooling inflation.
The first interest rate cut in September lowered the policy rate by half a percentage point to a range of 4.75% to 5.00%, marking a decisive shift after more than two years of struggling with high inflation, driven by signs of weakness in the summer labor market.
Since then, however, data has generally been stronger than expected, with consumer spending and job creation particularly robust, and price pressures slightly rising. Citigroup's U.S. Economic Surprise Index is at a six-month high.
Yet almost all publicly speaking Federal Reserve officials have not second-guessed their decision to ease policy with the rate cut on September 18, expressing satisfaction with the 4.1% unemployment rate and inflation now closer to the 2% target. Even the most hawkish among them have hinted at supporting further rate cuts to maintain the current economic situation.
San Francisco Fed President Daly said last week, "So far, I haven't seen any information that suggests we won't continue to lower rates."
She pointed out that in an economy where inflation is easing, policy is "very tight," and said, "I don't want to see further slowing in the labor market."
Daly is one of several policymakers who have hinted at pausing rate cuts at the upcoming meeting.
But no one is pushing to skip action in November.
Debate and Data
This is not to say there won't be debate.
However, since the last meeting, all Federal Reserve policymakers who have made substantive comments on the policy outlook have expressed satisfaction with further rate cuts.
The latest forecasts released at last month's meeting show that each of them believes that a full percentage point of rate cuts is needed before the policy rate reaches the long-term "neutral" level. The economic forecast summary shows that most believe there is room for at least two percentage points of rate cuts.
Fed Governor Waller said earlier this month, "While the size of rate cuts at the next one or two meetings is of great interest, I think the bigger message from the economic forecast summary is that there is a significant amount of policy accommodation that needs to be unwound, which will happen gradually if the economy continues to perform at its current best."
Federal Reserve policymakers will receive the latest data on their favored inflation gauge this week, with expectations that the data will show that potential price pressures still exist, while overall inflation has fallen to 2.1% year-on-year The meeting will also announce the preliminary data on third-quarter economic growth, with an expected annualized growth rate of 3%, as well as the latest estimate of job vacancies for each job seeker, which is Federal Reserve Chairman Powell's favorite labor market indicator, but this indicator has been gradually cooling down.
The U.S. government will also release the October employment report, which is expected to show a slowdown in job growth, but the underlying trend may be difficult to analyze, as recent hurricanes and the ongoing Boeing strike could lead to a decrease of up to 100,000 jobs in the month and push up the unemployment rate.
Thomas Simons, senior economist at Jefferies, wrote in a report, "Federal Reserve officials have indicated that due to various temporary factors, the data in the coming months will be very confusing. We believe the Fed has no reason not to cut interest rates at the two meetings scheduled for this year."
Federal Reserve policymakers are in a communication blackout period 10 days before each policy meeting, so if there is unexpected data during this period, they will not have the opportunity to guide expectations in any way.
However, like Simons, most analysts still insist on predicting a quarter-point rate cut next month. The financial markets have firmly bet on the same outcome.
Presidential Election
Next is November 5th, when Americans will go to the polls to elect a new president, members of Congress, and countless other public officials.
As Federal Reserve officials are set to meet the next day, Thierry Wizman, a strategist at Macquarie, said that a victory by former Republican President Trump over Democratic Vice President Harris in the presidential election could mean the Fed will pause rate hikes—not for political reasons, but because Wizman believes that the financial markets will significantly raise inflation expectations based on Trump's calls to increase import tariffs, crack down on immigration, and lower taxes.
Purdue University researcher Joseph Tracy believes the Fed should cut rates by another half point. He believes that monetary policy rules require the Fed to first bring rates closer to the final target more quickly, and then make small adjustments to fine-tune the landing rate.
Neither of these scenarios seems very likely. While Fed officials pay close attention to policy rules, they do not strictly adhere to these rules, preferring to use judgment and consensus in the decision-making process.
So, should rate cuts be abandoned if Trump wins? Tim Duy, Chief U.S. Economist at SGH Macro Advisors, wrote in a report that there are many reasons not to do so, including stable overall inflation expectations, but the outlook is "very bad."
The policy debate next month may lay the groundwork for a pause in the easing cycle in December, especially if inflation continues to rise and the labor market remains strong. According to forecasts, nearly half of the Fed policymakers last month may support this move However, at present - barring any special circumstances - the Federal Reserve seems poised to further lower borrowing costs.
Duyi wrote: "The Federal Reserve is expected to cut interest rates in November and December as it readjusts its policy to a more neutral stance."