Last month, the US Fed reduced its benchmark rate for the first time in four years. On September 18, the FOMC decided to reduce rates by 50 basis points for the first time since 2020.
Expectedly, markets are guessing how much the US Fed will cut rates in its next FOMC meeting. However, due to the recent spate of economic data, the market voices of a pause by the Fed are being heard. Eventually, the inflation and job market data will determine the pace and depth of future rate cuts.
The bets are perfectly placed—if inflation shows a spike, the Fed needs to take a pause, and if the employment sector gets hit, the Fed needs to cut the rate. Atlanta Federal Reserve Bank President Raphael Bostic recently said that he is open to a potential November rate-cut pause. The next FOMC meeting is taking place over two days, November 6-7.
Jamie Cox, Managing Partner, Harris Financial Group says, “Disinflation continues, but anyone who thought the Fed was going to lower rates by another 0.50 basis points in November is dead wrong. When interest rates aren’t high enough to lower growth, they aren’t high enough to stifle inflation completely either. The Fed will lower rates, but at a measured pace from here.”
So, what has gone awry for the US Fed, of late?
The US Federal Reserve began the rate-cutting cycle last month by cutting interest rates in an unexpected move labelling it as a front-loading strategy. However, several pieces of recent economic data looks to have complicated the Federal Reserve’s plans to gradually lower interest rates aimed for a “soft landing.”
Stubborn inflation and growing unemployment are the complete opposite of what the Fed wants. The tussle between US job numbers and inflation data will keep the central bank taking a cautionary step.
Inflation appeared to be on a declining path but recent US CPI data especially the core inflation numbers threw a surprise for the markets. The 12-month rate of core inflation, which leaves out volatile prices for food and energy, rose for the first time in September since March 2023 to 3.3%, still above the Fed’s goal for a 2% annual rate.
Further, the recent Department of Labor data shows that 258,000 people filed for unemployment for the first time, up from 225,000 the week prior.
Chris Zaccarelli, Chief Investment Officer for Independent Advisor Alliance says, “This is a critical inflation report as the Fed heads into next month’s meeting, trying to decide how much to cut interest rates. Given that the most recent jobs report was so strong, it was possible that a big upside surprise to inflation could have caused the Fed to pause at the next meeting and leave rates unchanged.
However, given that this month’s report was a little higher than expected it is still likely that the Fed will go ahead and cut by 25 bps next month and – if nothing in the labor market or inflation readings materially changes by the end of the year – another 25 bps in December.”