The Federal Reserve building, in Washington.Jim Young/Reuters
The nine days until Federal Reserve officials sit down to decide what to do next with interest rates features a veritable murderers’ row of events to shape their move – everything from key employment and inflation data to a closely fought U.S. presidential election.
Even so, it’s not clear what among that mix might steer the U.S. central bank from what is seen widely as its most likely next decision: A second in a series of interest rate cuts aimed at keeping the U.S. labour market healthy and the economy out of recession as inflation cools.
The Fed’s initial rate cut in September brought the policy rate down by a half of a percentage point to the 4.75 per cent-5.00 per cent range, a decisive turn after more than two years of battling decades-high inflation and one motivated by what had appeared to be signs of a weakening labour market over the summer. Since then, however, the data has generally come in stronger than expected, with consumer spending and job creation looking particularly robust, and price pressures picking up slightly.
Citigroup’s U.S. Economic Surprise Index is at a six-month high. But rather than second-guessing their decision to ease policy, nearly all Fed officials who have spoken publicly since the Sept. 18 rate cut have said they are pleased with an unemployment rate at 4.1 per cent and inflation that is now much closer to the central bank’s 2 per cent goal than before, and even the most hawkish among them have signalled support for further rate cuts to keep it that way.
“So far I haven’t seen any information that would suggest we wouldn’t continue to reduce the interest rate,” San Francisco Fed President Mary Daly said last week.
Noting that policy is “very tight” for an economy where inflation is easing, she said, “I don’t want to see the labour market slow further.”
Daly was one of a few policy-makers who signalled they could be open to a rate-cutting pause at an upcoming meeting. But none have pushed for skipping a move in November.
That’s not to say there won’t be a debate or that it won’t be, as September’s decision was, a close call for many. And yet all Fed policy-makers making substantive comments on the policy outlook since the last meeting have expressed comfort with additional rate cuts.
Updated projections published at the meeting last month show each of them believe there is at least a full percentage point of rate cuts to go before the policy rate gets to its longer-term “neutral” level. The Summary of Economic Projections, or SEP, shows a majority believe there’s at least two full percentage points of room for cuts.
“While much attention is given to the size of cuts over the next meeting or two, I think the larger message of the SEP is that there is a considerable extent of policy restrictiveness to remove, and if the economy continues in its current sweet spot, this will happen gradually,” Fed Governor Christopher Waller said earlier this month.
Fed policy-makers this week will get the latest reading of their preferred inflation gauge, which is expected to show underlying price pressures remain sticky while year-over-year headline inflation ticks down to 2.1 per cent.
Also on the docket is a first look at third-quarter economic growth, expected to come in at a strong 3 per cent annual rate, and an updated estimate of how many job openings there are for every job seeker, a favourite labor-market metric for Fed Chair Jerome Powell that has been showing gradual cooling.
The U.S. government also is due to release the October jobs report, which is expected to show job growth slowed, though the underlying trend could be hard to parse since recent hurricanes and an ongoing strike at Boeing could reduce the month’s payrolls by as much as 100,000 jobs and push up the jobless rate.
“Fed officials have flagged the fact that the data is going to be messy in the months ahead for a variety of temporary factors,” Thomas Simons, a senior economist at Jefferies, wrote in a note. “We do not see any reason why the Fed would skip a rate cut at either of the two upcoming meetings this year.”
Fed policy-makers observe a communications blackout for the 10 days ahead of every scheduled policy meeting, so they have no chance to publicly guide expectations one way or another in the event of a data surprise during those periods.
But, like Simons, most analysts have stuck to their calls for a quarter-percentage-point cut next month. Financial markets have firmed up bets on the same outcome.
Then comes Nov. 5, the day Americans go to the polls to elect a new president, members of Congress and countless other office-holders.
With Fed officials convening the very next day, Macquarie strategist Thierry Wizman, for one, says a victory by Republican former President Donald Trump over Democratic Vice President Kamala Harris in the race for the White House could mean a Fed pause – not for any political reason, but because Wizman figures financial markets would react by pricing in sharply higher inflation expectations based on Trump’s calls for higher tariffs on imports, an immigration crackdown and lower taxes.
Joseph Tracy, a distinguished fellow at Purdue University, says the Fed should go ahead with another half-percentage-point cut, arguing monetary policy rules call for getting rates more quickly within striking distance of their ultimate destination before making smaller adjustments to fine-tune the landing.
Neither path looks likely. Despite their attention to policy rules, U.S. central bankers don’t hew to them too closely, preferring to use judgment and consensus in their decision-making process. And as for abandoning rate cuts after a hypothetical Trump election victory? Among the many other reasons not to do so, including overall anchored inflation expectations, the optics “are terrible,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote in a note.
Next month’s policy debate could set the stage for a pause in the easing cycle in December, particularly if inflation continues to edge up and the labour market remains strong. That’s a move that nearly half of Fed policy-makers may have supported last month, according to the projections. But for now – barring anything extraordinary – the U.S. central bank looks headed toward further reductions in borrowing costs.
“The Fed is on track for rate cuts in November and, we think, December as it recalibrates policy to a more neutral stance,” Duy wrote.