Fed rate cut outlook: one other “happy” cut in November

Nearly all of his colleagues expected the Fed to chop rates by 1 / 4 of a percentage point. Some identified that a surprise rise in core inflation last month would deter central bankers from an enormous cut. Others on Wall Street warned that an even bigger move could be an indication that the economy was in worse shape and needed additional help.

But Feroli said in a note Thursday that the Fed must have cut rates in July and that a 50 basis point cut this month would help monetary policymakers catch up.

He also identified that Fed Chairman Jerome Powell managed to present the dovish rate cut a more aggressive tone by touting the strength of the economy and the need to maintain it strong.

“In other contexts, a larger move might reflect greater concerns about growth, but Powell repeatedly stressed that this was essentially a happy cut because easing inflation allows the Fed to take action to maintain a strong labor market,” Feroli wrote. “Moreover, optimal policy should bring the economy back to positive territory over time.”

Fed Governor Christopher Waller reiterated this view on Friday. to CNBC He voted for the half-point reduction because inflation is cooling faster than he expected.

The central bankers will meet again on November 6 and seven and Feroli expects an extra cut of fifty points. However, this depends on the subsequent two labor market reports showing greater weakness.

However, stronger employment growth would seal the Fed’s “Goldilocks scenario” of quarter-percentage-point cuts at each its November and December meetings, he added.

Investors are almost evenly distributed between 25 and 50 points for the November session, so CME’s FedWatch TrackerAnd the so-called dot plot of Fed officials’ forecasts suggests that they expect two rate of interest cuts of 1 / 4 of a percentage point each by the top of the 12 months.

Powell, for his part, warned that the Fed’s big move this month doesn’t provide any indication of the pace of subsequent rate of interest moves within the easing cycle.

“What we found most important about Powell’s statement was also one of the least surprising: future decisions will depend on the data,” Feroli noted. “If the labor market continues to weaken, we could see more large cuts. If job growth and the unemployment rate stabilize, the path is clear for a gradual return to neutral.”

Meanwhile, economists at Bank of America are also forecasting a half-percentage-point cut in November. After that, they expect a series of quarter-percentage-point cuts until the important thing rate of interest falls from 4.75 to five percent today to 2.75 to three percent sometime in 2025.

At Citi, economists have been seeing a bleak economic outlook for months and are warning of a probable recession. They also expect the Fed to chop rates of interest by half a percentage point at the subsequent meeting and assume that there will likely be further major cuts in the longer term.

“Powell struggled to explain why the labor market should stabilize at current levels and not deteriorate further when interest rates are likely to remain at levels the Fed considers hawkish for at least another year,” Citi wrote in a note on Friday. “And given that he described this week’s 50 basis point cut as a ‘commitment’ not to get behind the curve, we think the bar is low for a sustained weaker employment trend that could prompt further large rate cuts.”