The CME Group's FedWatch tool indicates a nearly even split in the probability of the Federal Reserve cutting interest rates by 25 basis points (bp) or 50 bp in November. Most officials believe the Fed has made significant progress balancing inflation and economic goals. Deutsche Bank predicts that if upcoming non-farm payroll reports show further labor market deterioration, a 50 bp rate cut in November is likely.
While Wall Street and the Fed agree on the initial 50 bp rate cut, there's still considerable disagreement regarding the pace of future cuts. Wall Street bets that economic and labor market deterioration will force the Fed to accelerate rate cuts. However, the Fed favors a gradual and steady rate cut approach, citing a robust U.S. economy, a balanced labor market, and continued inflation slowdown.
The FedWatch tool also shows an even probability for a 25 bp or 50 bp rate cut in November, with significant rate cuts expected in 2025.
Inflation Battle: Is the Fed Close to Declaring Victory?
The Federal Reserve has a dual mandate: achieving maximum employment and price stability. After two years of battling inflation, the U.S. inflation rate fell to 2.5% in August, its lowest since February 2021. Most officials believe the Fed has made significant progress in balancing these two goals.
Minneapolis Fed President Neel Kashkari stated on Monday that he supports last week's 50 bp rate cut decision. Inflation has significantly cooled and is nearing the Fed's 2% target, while the labor market shows signs of weakness.
Atlanta Fed President Raphael Bostic also noted substantial progress in fighting inflation, with increased labor market risks, although no "red lights" have appeared yet.
Despite inflation being above the Fed's target, it's estimated to reach the target within a year at the current pace. Fed Governor Christopher Waller stated last week that the 50 bp rate cut was the right move.
However, not all Fed officials believe the inflation battle is over. Fed Governor Michelle Bowman warned that inflation might rebound in the coming months and preferred a 25 bp rate cut in September.
The End of Rate Cuts? It Depends on Inflation and Employment
Fed Chair Jerome Powell described the 50 bp rate cut as a "recalibration" of monetary policy rather than a panic move to avoid recession. If the U.S. economy faces no recession risk, there's no urgency for the Fed to cut rates significantly.
The Atlanta Fed's GDPNow model estimates a 2.9% annual GDP growth for Q3, indicating a robust economy. The Fed's September forecast projects a 2% annual real GDP growth by 2027, with unemployment peaking at 4.4%.
However, the labor market is showing signs of deterioration. In August, the unemployment rate climbed to 4.2% from a 50-year low of 3.4% last year.
The Fed's September dot plot indicates a total of 100 bp rate cuts this year (implying another 50 bp cut), with an additional 100 bp cut by the end of 2025, targeting a rate range of 3.25%-3.5%.
Fed officials are divided on the neutral rate, but Bostic emphasized that it's not critical for current policy decisions.
Fed Governor Lisa Cook stated that future actions would depend on incoming data on inflation, employment, and economic activity. If current trends continue, further rate cuts will be appropriate.
November Rate Cut: Focus on Upcoming Non-Farm Payroll Reports
The next FOMC meeting is scheduled for November 6-7, shortly after the U.S. elections. As usual, Fed officials are keeping their options open for the next move. Waller noted that if unemployment worsens and inflation further slows, another 50 bp rate cut is possible. Conversely, if inflation rebounds, the Fed may pause rate cuts.
The focus now shifts to the upcoming non-farm payroll reports for September and October. The October report, released during the FOMC policy meeting's quiet period, will be crucial for rate decisions.
Deutsche Bank's Chief U.S. Economist Matthew Luzzetti wrote that upcoming labor market data would strengthen the Fed's confidence in the weakening labor market trend. If the unemployment rate exceeds the Fed's 4.4% forecast and non-farm payrolls add around 100,000 jobs or fewer per month, a 50 bp rate cut in November is highly likely, with more significant job declines justifying an accelerated pace of rate cuts.
