Investors Expect Jay Powell to Hold Fed’s Rate Cut Plans (Video)

Investors expect Federal Reserve Chairman Jay Powell to extend plans to cut rates this week with a 25 basis point cut, despite some signs of steady inflation and mixed signals on the labor market.

“(This) week’s FOMC meeting is an extremely easy call,” JPMorgan Chase (JPM), chief economist Michael Feroli said in a note. “The argument for reduction is still relevant,” he added.

That doesn’t mean the discussions between members of the Federal Open Market Committee on Wednesday and Thursday will necessarily be smooth sailing. Fed policymakers will need to understand recent data that indicate a strong economy, stable inflation and a a muddled labor market wracked by weather and worker strikes.

There could be a debate between those who want to cut, those who might support a pause, or those who would support cuts combined with wording aimed at a more gradual approach to future cuts.

Fed watchers expect Powell to reach a consensus on a small cut after a large cut in September.

“We expect Fed Chair Powell to once again be the voice of reason, urging the FOMC to make prudent monetary easing,” said EY Chief Economist Gregory Dako.

“I don’t think much has changed people’s minds,” added Wilmington Trust chief economist Luke Tilley, who also expects a 25 basis point cut this week.

Traders agree. They set prices with an almost 100% chance of a 25 basis point decline. In September, the Fed predicted two more small cuts through the end of 2024.

Former Kansas City Fed President Esther George said the November break will be a tough sell.

“If they miss that meeting, what’s the explanation,” George said in an interview. “Given that they took such a hard turn in September with a 50 basis point cut, you really need to have a story to tell as to why you either missed the meeting or why you want to slow down.”

George expects a 25-basis-point cut this week and expects Powell to explain at his post-meeting press conference that the Fed decided to cut amid a strong economy to support those rates, echoing comments the chairman made in September. 30.

“I think we’re going to hear, ‘and we want to keep it that way,'” George said. “We don’t expect any softening.”

Complication

What could be divisive for some politicians this week is the latest central bank inflation figures.

The good news was that the gauge, the personal consumption expenditures (PCE) index, showed that inflation rose 2.1% during September, just short of the Fed’s 2% target.

But a complicating factor is that the Fed instead prefers to look at inflation on a “core” basis, which excludes volatile food and energy prices.

According to this indicator, inflation amounted to 2.7%, remaining at the same level as in August. Core PCE has now held at 2.7% for three straight months instead of falling.

These new data — combined with higher-than-expected inflation readings from the separate consumer price index — could add to the case made by hawkish FOMC members for gradual and cautious tapering going forward.

One of the FOMC members who dissented from the September rate cut, Michelle Bowman, did so because she was concerned that inflation was not fully under control.

Another complication for policymakers is that their job market picture is clouded by the latest jobs report, which showed only 12,000 jobs were added in October, partly due to the temporary effects of two hurricanes and a hit to jet maker Boeing. The shorter survey period due to the calendar also affected the data.

The unemployment rate remained steady at 4.1%, suggesting that the month’s weak wage growth was a short-term phenomenon and that jobs will rebound next month.

But market watchers are grappling with whether the report still shows a broader deterioration in the labor market without the cumulative effect of the hurricanes and strikes, especially since September was revised downward.

“The large one-time shocks that hit the economy in October don’t make it clear whether the labor market was changing over the course of the month, but looking at the downward trend in job growth shows that there was a cooling before those shocks,” Bill says. Adams, chief economist at Comerica Bank (CMA).

Wilmington Trust’s Tilley tries to break down jobless claims data for a clearer picture of the labor market, saying the data is “really stable” now and there are no signs of permanent layoffs.

Initial claims fell from a recent peak of 260,000 (for the week ending October 5) to 216,000 for the week ending October 26.

But Tilley does see a slowdown in hiring for people entering the workforce.

“It can be devastating,” Tilley said. “If those who are looking for work can’t find it…then they’re not going to spend as much or they’re not going to do those bills.”

Some Fed watchers said they thought the Fed would cut in November and then pause in December, noting that the economy was still growing at about a 3% pace.

They also said in December that Fed officials may revise down their rate cut forecasts and show a slower pace of future cuts than expected just a few months ago.

But this month, they added, the Fed is not going to pull any surprises at its meeting, which ends less than 48 hours after voters cast their ballots in the US presidential election.

“The votes are probably still being counted” during the Fed meeting, Wilmington Trust’s Tilley said. “They’d better just cut back, keep their heads down and not say anything new like that.”

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