The November 6-7 meeting of the Federal Reserve has investors and economists alike closely watching several key indicators over the question: will the Fed cut rates again? Two important reports are scheduled to arrive this week: one on inflation and another in the labor market. Both are likely to figure significantly in the final call when the central bank gears up for its decision.
Key Takeaways:
Will the Fed Cut Rates Again? This week's inflation and employment reports would probably seal the deal.
Current Market Sentiment gives a 95.7% chance of at least a 25-basis-point rate cut at the Fed's November 7 meeting.
Economic Data to Watch: To name two, there are the PCE inflation report and the Labor Department's report on employment.
The Fed's Gradual Approach: Federal Reserve officials have been emphasizing the need to gradually lower the rates, first ensuring that the economic outlook stabilizes.
Which Economic Indicators to Watch: Will Fed Cut Rates Again?
Whether the Fed cuts rates again is the big question. Much depends on the inflation data due Thursday and the labor market report on Friday, say experts. So far, Federal Reserve officials have signaled a gradual pace of rate cuts, and new data could either reinforce the direction or sway the decision to a temporary pause.
The Inflation Gauge: A Key Determinant
The first big indicator this week is the PCE index, the Fed's favored inflation gauge. The median estimates from economists are for core inflation, which strips out the volatile food and energy components, to have eased slightly to 2.6% in September from 2.7% the prior month. While that would be a good omen for those hoping for rate cuts, it is still above the Fed's long-term target of 2%.
Fed officials will be keenly watching this figure, which might decide whether they continue to make cuts at their current clip. "A firmer-than-expected inflation reading may cause the Fed to reevaluate the pace of its cuts," said Wil Stith, a bond portfolio manager at Wilmington Trust.
Labor Market Report: What to Expect
A second key report that will help shape the Fed's policy decision is the Labor Department's employment report, due out on Friday. The number of jobs added by the U.S. economy in October is forecast at 125,000 by forecasters, compared to 254,000 recorded in September. The unemployment rate is forecast at 4.1%. Events outside the economic landscape, however, like hurricanes and strikes at major companies like Boeing, might render interpretations of the data less clear-cut.
Fed Governor Christopher Waller said, "This report is likely to show a large but temporary loss of jobs from the two recent hurricanes and the strike at Boeing." Even if the job market appears more fragile, analysts do not rule out a slim rate cut by the Fed.
Market Sentiment: A Rate Cut Is Expected, But Could There Be a Pause?
The consensus is almost uniform that a 25-bp cut is pre-determined as markets prepare for the Fed meeting. Fed funds futures showed a 95.7% likelihood of the Fed cutting the benchmark interest rate to a range between 4.5% and 4.75%. Yet, there are still some signals on a possible pause, especially if this week's data surprises upward.
"The signals we've gotten from Fed officials are broadly consistent with a quarter-point cut," said Matthew Luzzetti, chief U.S. economist at Deutsche Bank. Yet, he went on to say that unusually strong reports might cause the Fed to hold off.
Discussion: Will the Fed Cut Rates Again or Hit Pause?
Economists and market analysts are split on the issue. Some, such as Jamie Cox, managing partner at Harris Financial Group, think the Fed is "already on the glide slope of a 25 basis rate cut in November," regardless of what the data shows.
Still, some analysts said the numbers on inflation and employment have a bearing on the outcome. "If both reports come in hotter than expected, that would make Fed debates more heated, and could push them toward a pause," said Jeffrey Roach, chief economist at LPL Financial.
The median estimate from Fed policymakers surrounded by uncertainty sees two more 25-basis point rate cuts for the remainder of the year. If the Fed were to pause in November, it's likely to be out of concern over inflation heating up once again, or an labor market exhibiting unexpected strength.
A Gradual Approach: What Fed Officials Are Saying
Taken together, recent statements from various Fed officials suggest a dovish consensus for a gradual pace of rate reductions. Minneapolis Fed President Neel Kashkari and Dallas Fed President Lorie Logan have both sounded a cautious tone, with Kashkari emphasizing the need to avoid "outsized moves."
Chairman Jerome Powell also hinted in the same direction, noting that the Fed was determined to strike a balance between keeping inflation low and not killing the jobs market. "We want to ensure that policy gradualism prevails through the year-end," said Gregory Daco, chief economist for EY.
The Impact of the Upcoming U.S. Presidential Election
Adding another layer of complexity is the fact that the U.S. presidential election is scheduled on November 5. Traditionally, in election years, the Fed moves the timing of its November meeting to the days immediately after the election. In that way, the Fed can react appropriately without being seen as politically biased.
As Matthew Luzzetti put it, "The Fed's decision is unlikely to be influenced directly by the election outcome, but they will want to ensure their policy remains on track, irrespective of the political landscape."
Conclusion: Will the Fed Cut Rates Again? It's All Up to the Data
The following inflation and employment reports will closely be watched by the Fed and investors. The consensus to a 25-basis point cut is strong; however, unexpected data can shift the vote in either direction. The Federal Reserve's decision on the rate cut further or going into pause mode, depends on the tightrope of balancing economic growth without heating up inflation once again.
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