MNI FED WATCH: On Hold Again As Rate Cut Speculation Builds

The Federal Reserve is expected to keep interest rates on hold for a third straight meeting Wednesday and keep the door open to hiking again next year if progress stalls on getting inflation back to 2%, but anticipation is building for cuts starting as early as spring.

The fed funds rate has remained in a 5.25%-5.5% target range since July, accompanied by a bias toward tightening again in the post-meeting statement: “In determining the extent of additional policy firming that may be appropriate to return inflation to 2% over time, the Committee will take into account the cumulative tightening of monetary policy, the lags with which monetary policy affects economic activity and inflation, and economic and financial developments.”

That isn't expected to change this week. But the FOMC will likely lower its median "dot plot" estimate for rates at the end of 2024 to around 4.9% from 5.1% in the September projections, former Fed officials and economists told MNI. (See: MNI: Fed SEP To Show Two '24 Cuts, Slower Growth-ExOfficials)

That would fall short of market pricing for over 100 bps of cuts next year, with nearly 40% chance of a March start. Market bets have been wrong in forecasting a dovish turn over much of this year.

Some ex-officials said 125 to 150 basis points of cuts would be reasonable in scenarios with faster-than-expected disinflation, though the Fed is unlikely to pencil it in as their baseline scenario this week. (See: MNI INTERVIEW: Five Fed Cuts In 2024 Are 'Plausible' -Wilcox)

LABOR MARKET RESILIENCE

Former Fed Board economist John Roberts told MNI the FOMC could implement its first cut once trailing 12-month core inflation falls to about 2.8%, which could come around the middle of next year. (See: MNI INTERVIEW: Fed Could Cut When Core PCE Reaches About 2.8%)

Growth would also need to slow below its longer run pace and the unemployment rate rise slightly from where it is now to justify a normalization of interest rates, Roberts said. The Atlanta Fed's GDPNow estimates fourth quarter growth to have skidded to just 1.2% from a red-hot 5.2% pace in the third quarter, but the labor market continues to shows to surprise with its resilience.

The jobless rate unexpectedly bumped back down by two-tenths to 3.7% last month, and growth in aggregate wage payments over the past six months accelerated to a 5.7% annualized rate from the 5.4% increase seen over the past year. Consumer spending has similarly sped up to a 5.5% rise over the past six months from 5.3% over the year, arguing for caution in signaling a shift to a less restrictive policy stance now. (See: MNI INTERVIEW: US Demand Still Too Hot For Soft Landing)

EASIER CONDITIONS

Financial conditions are providing policymakers with some room to be patient once again. After longer-term Treasury rates surged over the summer and fall months, the FOMC inserted a reference to tighter financial conditions' likely to weigh on economic activity, hiring and inflation in the Nov. 1 statement, and some officials cited higher yields as a reason not to raise rates.

Since then, 10-year Treasury yields have retreated over 70 bps, partly in anticipation of imminent FOMC easing. Fed Governor Christopher Waller said last month if inflation stays around 2.5% for several more months, the Taylor rule would prescribe beginning to lower rates.

But the more easing priced in, the less urgency for the Fed to cut rates and instead signal it will stay restrictive for longer.

"It would be premature to conclude with confidence that we have achieved a sufficiently restrictive stance, or to speculate on when policy might ease," Fed Chair Jerome Powell warned two weeks ago. "We are prepared to tighten policy further if it becomes appropriate to do so."