The Federal Reserve may ease monetary policy more aggressively than anticipated. St. Louis Fed President Alberto Musalem recently indicated that the U.S. economy and labor market might be weaker than expected, suggesting a faster rate cut could be appropriate.
With U.S. inflation cooling and nearing the Fed’s 2% target, traders are betting on another significant rate cut of 50 basis points in November. Futures contracts currently reflect a 54% probability of this outcome.
Moreover, the European Central Bank (ECB) might also embark on aggressive rate cuts. Deutsche Bank economists predict the ECB may cut rates by 50 basis points in December as well.
On September 27, St. Louis Fed President Musalem highlighted that excessively loose financial conditions could extend the timeline for achieving the 2% inflation target. He emphasized the need to gradually relax policy restrictions, citing that the U.S. economic downturn might be more severe than currently anticipated.
Musalem, who took over as St. Louis Fed President in April, supports the September decision to cut the federal funds rate target by 50 basis points. He remains optimistic about the labor market and overall economic strength but acknowledges potential risks requiring quicker rate cuts.
Previous Fed Governor Christopher Waller also mentioned that he would consider more aggressive rate cuts if economic data weakens faster. Musalem predicts that the Fed will likely cut rates by 25 basis points multiple times in 2024, potentially accelerating if the job market underperforms.
The U.S. Commerce Department’s latest report indicates an 8% year-over-year increase in the personal consumption expenditures price index for August, slightly below expectations. Bloomberg's latest survey aligns with the Fed's forecast, anticipating U.S. inflation to reach the 2% target by early 2025, with a slight rise in unemployment.
While futures contracts show a significant likelihood of a 50 basis point cut in November, there’s still a 46% chance of a 25 basis point cut. However, Investors Edge's John Choong cautions that deeper analysis of PCE data reveals underlying inflation pressures masked by declining energy costs, suggesting a hasty rate cut might be unwarranted.
The ECB is also expected to accelerate rate cuts. Deutsche Bank sees the ECB cutting rates by 50 basis points in December, aiming for a final rate of 2%-2.5%. Markets now predict an 80% chance of a 25 basis point cut by the ECB on October 17, with similar expectations from HSBC.
Falling inflation in the Eurozone, evidenced by September data from France and Spain, supports these aggressive rate cut expectations. France's consumer prices rose by 1.5%, and Spain's inflation dropped to 1.7%, driven by lower energy costs.
Other central banks, including Sweden's, are also contemplating aggressive monetary easing, moving from 25 basis point cuts to potentially larger 50 basis point reductions.
