Cut or pause? 2 critical reports will determine what Fed does in November.
10/28/2024 16:17
Two reports this week on inflation and the labor market could swing the final calculus for Fed policymakers as they weigh another rate cut at their Nov. 6-7 meeting.
The coming week will seal what the Federal Reserve does in November.
Cut rates again or pause? Those appear to be the two options on the table for central bank policymakers at their next meeting on Nov. 6-7, and two reports this week on inflation and the labor market could swing the final calculus.
If inflation numbers released Thursday look firmer than expected and the jobs picture in a Labor Department report on Friday is hotter than expected, "I think they could debate pausing since they cut by 50 basis points before," said Wil Stith, bond portfolio manager for Wilmington Trust.
Strong job gains "could convince the Fed to pause in November," added Jeffrey Roach, chief economist for LPL Financial.
But other Fed watchers said it’s not likely the data due out Thursday and Friday will change the Fed’s path downward.
"The Fed is already on the glide slope of a 25 basis rate cut in November and is unlikely to alter that trajectory, no matter what the data say," said Jamie Cox, managing partner for the Harris Financial Group.
Read more: What the Fed rate cut means for bank accounts, CDs, loans, and credit cards
Barring a major surprise in the jobs report, "there’s no reason to think the Fed won’t cut rates another quarter point on Nov. 7," said Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.
As of now, many traders agree with that assessment. Investors, as of last Friday, were pricing in a greater than 90% chance of a 25 basis point rate cut when Fed officials meet on Nov. 6-7.
What is a sure bet is that all Fed policymakers are going to be paying close attention to the reports due out this week.
First up is a new reading Thursday from the Fed’s preferred inflation gauge — the Personal Consumption Expenditures (PCE) index.
It is supposed to show that so-called core inflation, which excludes volatile food and energy prices, cooled a tenth of a percent to 2.6% during the month of September from 2.7% in August. The Fed’s goal is to get this measure all the way down to 2% over time.
A separate reading on inflation, known as the Consumer Price Index, was warmer than expected during the month of September. That offered new ammunition for those on the Fed arguing for a gradual pace of rate cuts following the jumbo reduction in September.
The second critical report this week will be a reading on the labor market due out Friday.
That report may not offer officials a clear assessment because it could be buffeted by two major hurricanes that temporarily caused people in the regions affected by the natural disasters to be out of work, as well as an ongoing labor strike at jet maker Boeing (BA).
Economists expect 125,000 jobs will be added for the month of October, which would mark a drop from the stronger-than-expected 254,000 payrolls added in September. The unemployment rate is expected to hold steady at 4.1%.
"Unfortunately, it won’t be easy to interpret the October jobs report," said Fed governor Christopher Waller on Oct. 14.
"This report will most likely show a significant but temporary loss of jobs from the two recent hurricanes and the strike at Boeing," added Waller, who expects the storms could reduce employment growth by more than 100,000.
Anecdotal evidence collected across the Fed’s 12 regional bank districts in October showed a gently cooling but stable job market, according to the latest release of the Fed’s Beige Book.
Layoffs were limited and employment increased slightly, with more than half of the Fed districts reporting slight or modest growth, but that hiring was focused on replacing jobs rather than creating new ones. The pace of wage increases also slowed.
Waller is among a group of Fed officials who have used speeches in recent weeks to argue for a "gradual" approach to cutting rates as they absorb some new evidence that inflation and the job market remain warm.
Minneapolis Fed president Neel Kashkari has said he is looking at "modest" interest rate reductions in the "coming quarters," while Kansas City Fed president Jeff Schmid noted his preference “would be to avoid outsized moves."
And Dallas Fed president Lorie Logan has said that rates will come down "gradually," citing an increased risk that the job market could worsen and a danger that inflation could still heat up again.
The median estimate of all Fed policymakers in September was for two more 25 basis point rate cuts for the remaining two meetings of the year.
Atlanta Fed president Raphael Bostic is one who has said he is entertaining the idea of holding rates steady at the next meeting.
He told the Wall Street Journal he was "totally comfortable" with holding steady at the Fed's Nov. 6-7 meeting and that he had already penciled in an estimate of just one more rate cut this year.
Despite hints of a pause from hawkish members of the Fed, EY chief economist Gregory Daco cited the guidance of Fed Chair Jay Powell as a reason why he believes the Fed will stick with two more 25 basis point cuts at the remaining two policy meetings this year.
"Fed Chair Powell has stressed that policy gradualism will prevail through year end," Daco said in a note.
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