Investors are counting on Jay Powell to keep Fed rate cut plans on track
11/04/2024 16:05
The Fed is poised to cut rates by a quarter point this week despite some signs of stubborn inflation and mixed signals about the job market.
Investors are counting on Federal Reserve Chair Jay Powell to keep rate-cutting plans on track this week with a 25 basis point reduction, despite some signs of stubborn inflation and mixed signals about the job market.
"[This] week’s FOMC meeting is a refreshingly easy call," JPMorgan Chase (JPM) chief economist Michael Feroli said in a note. "The reasoning for a cut is still valid," he added.
That doesn’t mean the discussion among members of the Federal Open Market Committee on Wednesday and Thursday will necessarily be a smooth one. Fed policymakers will have to make sense of recent data indicating a strong economy, persistent inflation and a muddled jobs market disrupted by weather and worker strikes.
There could be a debate between those who want to cut, those who could support a pause, or those who would support a cut combined with language designed to communicate a more gradual approach to future reductions.
Fed watchers expect Powell to forge a consensus around the small cut, following a jumbo-sized reduction in September.
"We look for Fed Chair Powell to once again be the voice of reason corralling the FOMC to prudently ease monetary policy," said EY Chief Economist Gregory Daco.
"I don't think that there’s very much that has changed people's opinions," added Wilmington Trust chief economist Luke Tilley, who also expects a 25 basis point cut this week.
Traders agree. They are pricing in a near 100% chance of a 25 basis point cut. The Fed in September predicted two more small cuts for the remainder of 2024.
Former Kansas City Fed president Esther George said a pause in November would be a hard sell.
"If they skip this meeting, what would be the explanation," George said in an interview. "Given that they made such a hard turn for September with a 50 basis points cut, you really have to have a story to tell about why you'd either skip a meeting or explain why you want to slow down."
George expects to see the 25 basis point cut this week and predicts Powell will then explain at his post-meeting press conference that the Fed decided to cut in the face of a strong economy to sustain that performance, echoing comments the chairman made on Sept. 30.
"I think what we're going to hear is: 'and we want to keep it that way,'" George said. "We are not looking to see softening.'"
What could be a divisive topic for some policymakers this week is the latest reading from the central bank’s preferred inflation gauge.
The good news was that the gauge, the Personal Consumption Expenditures (PCE) index, showed inflation rose 2.1% during the month of September, which is within shouting distance of the Fed’s 2% goal.
But the complicating factor is that the Fed favors instead looking at inflation on a "core" basis, which excludes volatile food and energy prices.
On that metric, inflation clocked in at 2.7%, holding the same level as August. Core PCE has now held at 2.7% for three months in a row, instead of dropping.
That new data — combined with a warmer-than-expected inflation reading from a separate Consumer Price Index — could offer more fodder for an argument being made by hawkish FOMC members to pursue any future cuts gradually and cautiously.
The one FOMC member who dissented to the September rate cut, Michelle Bowman, did so because she was concerned that inflation wasn’t fully under control.
Another complication for policy makers is that their picture of the job market is clouded by the latest labor report, which showed only 12,000 jobs were created during October due in part to the temporary effects of two hurricanes and a strike at jet maker Boeing. A shorter survey period because of the calendar also affected the data.
The unemployment rate held steady at 4.1%, implying that weak payroll gains for the month was a short-term phenomenon and that jobs will bounce back the following month.
But market observers are grappling with whether the report still reveals a broader deterioration in the labor market absent the cumulative effect of the hurricanes and strike, especially since there were downward revisions to September gains.
“The big one-off shocks that struck the economy in October make it impossible to know whether the job market was changing direction in the month, but the downward revisions to job growth through September show it was cooling before these shocks struck,” says Bill Adams, chief economist for Comerica Bank (CMA).
Wilmington Trust’s Tilley is looking to separate data on unemployment claims for a clearer picture of the job market, noting that such data now is "really stable" and that there aren’t signs of permanent layoffs.
Initial claims have fallen from their recent peak of 260,000 (in the week ending Oct. 5) to 216,000 in the week ending Oct. 26.
But Tilley does see a slowdown in hiring from more people entering the labor market.
"That could be pernicious," Tilley said. "If those looking for a job can’t find one…then they're not going to spend as much or they're not going to make those bills."
Some Fed watchers said they think the Fed will cut in November and then pause in December, noting that the economy is still growing at a roughly 3% pace.
They also said in December Fed officials may revise their rate cut predictions and show a shallower pace of future cuts than anticipated just a few months ago.
But this month, they added, the Fed is not looking to spring any surprises in a meeting that will end less than 48 hours after voters cast their votes in the US Presidential election.
"There are probably votes still being counted" as the Fed meets, said Wilmington Trust’s Tilley. "They'd rather just cut, keep their heads down, and not say anything all that new."
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