MNI FED WATCH: A 2nd Straight Rate Cut But Cloudy Skies Ahead
MNI (WASHINGTON) - The Federal Reserve is expected to reduce interest rates for a second straight meeting Thursday, cutting by a quarter point to the 4.5% to 4.75% range, but to take a cautious tone on future rate moves two days after the U.S. presidential election.
September's aggressive half-point start to the U.S. rate-cutting cycle appears to have been a one-off for now barring significant and unexpected deterioration in the labor market. Fed officials are making a case for gradual easing and downplaying the importance of the latest job report showing hiring nearly slowed to a halt in October. (See MNI POLICY: Fed To Scale Back To 25BP As US Outlook Stays Rosy)
A Boeing strike and extreme weather distorted the underlying trend of the labor market last month. Data since September have been otherwise largely in line with policymakers' narrative of a cooling job market and easing inflation. (See MNI POLICY: Bumpy US Data Won't Take Fed Off Steady Course)
The unemployment rate retreated a tenth after the jumbo cut in September and remained at 4.1% last month, while hiring for August and September was revised down. The employment cost index, the broadest measure of labor costs, also notched its smallest gain since 2021 in the third quarter, supporting the view of a labor market gradually returning to normal. (See MNI INTERVIEW: US Job Market Slowdown Reflects Slowing Growth)
LAST MILE
Recent inflation data tell a soft landing story. The Fed's preferred price measure, the personal consumption expenditures price index, rose 2.1% in September, very close to the 2% target.
Core PCE inflation has been stuck at 2.7% since May, but Fed officials have cited a number of reasons why they're confident housing and non-housing services inflation will eventually ease.
Judging that the risks to the Fed's employment and inflation goals are roughly in balance, the FOMC is expected to repeat the guidance “in considering additional adjustments to the target range for the federal funds rate, the Committee will carefully assess incoming data, the evolving outlook, and the balance of risks.”
UPCOMING PAUSE
The path in 2025 looks more uncertain. The 10-year Treasury yield has risen some 60 basis points since the Fed's first rate cut on strong consumption and growth numbers and the likelihood that the incoming U.S. president will add to the debt load through additional spending, tax cuts or a combination of both. (See MNI INTERVIEW: CBO's Swagel Sees Fiscal Headroom In Near Term)
Expansive fiscal policy could stoke inflation again, and the risk would be higher if Donald Trump is elected and makes good on threats of deportations and tariffs, economists say.
Futures traders see a pause in the next few meetings. Some former Fed officials have also urged the FOMC to take a wait-and-see stance, citing the difficulty in making an about-face on rates if inflation proves sticky. But Chair Jerome Powell and his colleagues are likely to put off that discussion until there's more clarity from the new administration and data. (See: MNI INTERVIEW: Fed Should Halt Cuts Given Strong Economy-Levin)