TLDR:
- Fed expected to implement 25 basis point rate cut despite mixed economic signals
- Core PCE inflation remains steady at 2.7% for three months
- October jobs report showed only 12,000 new jobs, affected by hurricanes and strikes
- Traders pricing in near 100% chance of rate cut
- Fed unlikely to make surprising moves with meeting coinciding with election period
Federal Reserve Chairman Jerome Powell and his colleagues are preparing to cut interest rates by 25 basis points this week, marking their second reduction in as many months. The move comes amid a mix of economic signals that paint a complex picture of the U.S. economy.
JPMorgan Chase chief economist Michael Feroli describes the upcoming Federal Open Market Committee (FOMC) meeting as “a refreshingly easy call.” Market participants seem to agree, with traders pricing in an almost 100% probability of a quarter-point cut.
The Fed’s preferred inflation measure, the Personal Consumption Expenditures (PCE) index, showed overall inflation at 2.1% in September, approaching the central bank’s 2% target. However, the core PCE, which excludes volatile food and energy prices, has remained unchanged at 2.7% for three consecutive months.
October’s employment report revealed only 12,000 new jobs, though this modest figure was heavily influenced by temporary factors. Two hurricanes and a strike at Boeing affected the numbers, while a shorter survey period due to the calendar also played a role. The unemployment rate held steady at 4.1%.
Initial unemployment claims have shown improvement, falling from 260,000 in early October to 216,000 by month’s end. Wilmington Trust’s chief economist Luke Tilley notes these numbers are “really stable” without signs of permanent layoffs.
The timing of the Fed meeting is noteworthy, occurring just after the U.S. presidential election. According to Tilley, this timing suggests the Fed will likely maintain a low profile, preferring to “cut, keep their heads down, and not say anything all that new.”
Former Kansas City Fed president Esther George believes skipping a rate cut this month would be difficult to justify. She points to the Fed’s September decision for a 50-basis point cut, suggesting that changing course now would require a compelling explanation.
The economy continues to grow at roughly 3%, leading some analysts to predict the Fed might pause in December after this month’s expected cut. These observers suggest the Fed may revise its future rate cut predictions to show a more gradual pace than previously anticipated.
The FOMC’s internal discussions may not be entirely smooth. Some members might advocate for a pause, while others could push for combining the cut with language suggesting a more measured approach to future reductions.
Michelle Bowman, who dissented from September’s rate cut decision, expressed ongoing concerns about inflation control. Her position highlights the varying viewpoints within the committee regarding the proper pace of monetary policy adjustments.
Bill Adams, chief economist for Comerica Bank, notes that recent downward revisions to September’s job numbers indicate cooling in the labor market even before October’s temporary disruptions. This trend adds another layer to the Fed’s decision-making process.
Wilmington Trust’s analysis points to a slowdown in hiring as more people enter the labor market. Tilley warns this could become “pernicious” if job seekers struggle to find employment, potentially affecting consumer spending and bill payment abilities.
The Fed’s decision comes as market observers work to separate temporary effects from underlying economic trends. The combination of weather events, strikes, and calendar quirks has complicated the interpretation of recent economic data.
EY Chief Economist Gregory Daco expects Powell to serve as “the voice of reason” in guiding the FOMC toward a prudent easing of monetary policy. This approach aligns with Powell’s recent messaging about maintaining economic momentum.
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