Following their own rules, Federal Reserve officials have been quiet to get ready for their meeting on Nov. 7 to decide on interest rates.
Economists think that the Federal Reserve will lower its key interest rate by a quarter percentage point to a range of 4.5% to 4.75% based on the talks that Fed officials have given over the past six weeks. It’s not likely that any of the numbers, even important ones like the September PCE inflation report and the October jobs report that will be out this week, will change their minds.
“The signals we’ve gotten from Fed officials are pretty much all in line with [a quarter-point cut],” said Matthew Luzzetti, who is the chief U.S. economist at Deutsche Bank in New York.
He said that most Fed officials have pushed for a slow and measured rate of rate cuts.
I agreed with Tim Duy, who is the head economist at SGH Macro Advisors. He said, “I think they are going to cut by 25 basis points.”
A 95.7% chance of a quarter-point cut is built into Fed-funds futures, which means that the rate will likely be cut.
Before they meet, the Fed will look at the September unemployment rate and the October jobs report next Thursday and Friday, respectively.
In some cases, the numbers might change their minds, but Luzzetti said that this year, officials are not likely to be swayed.
Why a cut of a quarter point?
There seems to be a lot of agreement among officials about the themes in the new data, according to
“The focus is still on keeping the job market strong while inflation continues to fall,” he said. “For both inflation and the job market, the relevant story in the data, if not necessarily the very latest data points, is one of ongoing slowing.”
The government has said that interest rates are “restrictive,” which means they slow down the economy. Since inflation has gone down, this isn’t as important anymore, and the Fed doesn’t want to hurt the job market needlessly.
They think that their policy rate is still “restrictive,” which means it is slowing down demand, because the job market is slowing down.
Due to the two terrible hurricanes that hit the southeast in October, the jobs figures will likely be a mess and not very useful.
Duy said, “I don’t think they’ll pay much attention to this next employment report.”
Kathy Bostjancic, chief economist for Nationwide, said she thinks that 100,000 jobs were added in October. This is after taking out 36,000 jobs lost because of the Boeing Co. strike and 60,000 jobs lost because of the storms.
The 100,000 number is also the middle prediction of experts polled by the Wall Street Journal.
But Bostjancic said, “It will be much harder to get a handle on employment unless it’s very weak or very strong.”
Luzzetti also said that the Fed doesn’t want to go over the communication problems that came up at its meeting in September.
The market thought that the Fed had decided on a quarter-point cut before the September meeting.
But then the Financial Times and Wall Street Journal said, in what was seen as at least Fed-inspired reporting, that the choice between a possible quarter-point or half-point cut was “a close call.” In the end, the Fed decided to a half-point cut that was more aggressive.
Could the Fed make another half-point cut? Based on data that has come in since the last meeting, economists don’t think this is likely.
“The consumer data and payroll numbers were both better than expected.” “Inflation shot up faster than we thought it would,” said Lindsey Piegza, chief economist at Stifel Financial.
The Fed has been cutting interest rates. Could they stop? Also, that doesn’t seem likely.
“Nobody has pushed for skipping a cut at an upcoming meeting as part of moving toward a more gradual approach to cuts going forward,” an LH Meyers economist told clients in a note.
The Fed will also know the outcome of the presidential election on November 5 before they meet. The FOMC’s November meeting is moved from Tuesday and Wednesday to Wednesday and Thursday during election years. It used to be on Tuesday and Wednesday.
Luzzetti said he didn’t think the election would change the Fed’s mind about cutting rates by a quarter point on November 7. He said that it wouldn’t be clear how a new government would affect the economy until 2025.
They all agree that after November, things will be harder for the Fed.
If economic data keeps coming in strong, it will make people wonder how tight Fed policy really is.
Duy said that he thinks Powell will rely on the Fed’s own forecast at his November press conference. He said that the Fed plans to cut rates by another quarter-point in December and will wait to make a decision until it sees more data.
Duy said, “I don’t think the Fed is going to dove it up or hawk it up.”
Fed-funds futures show that there is a 22.3% chance of a pause in December right now.
Piegza of Stifel said she wouldn’t say for sure that the numbers wouldn’t have some effect on the Fed’s decision.
“I don’t think 50bp is a good idea.” She said, “I think 25bp is the base case, but a much better employment report along with PCE inflation could move the needle toward skipping November.”
