No chance for 50 basis points, hanging on 25 basis points? The Fed may pause rate cuts after non-farm payrolls

According to Ed Yardeni, a senior Wall Street figure, the Federal Reserve's monetary easing actions in 2024 may have come to an end as last Friday's strong non-farm payroll report highlighted the resilience of the world's largest economy.

Yardeni stated that with oil prices rebounding and China seeking to stimulate its economy, further policy easing by the Federal Reserve could potentially trigger inflation. He is the founder of Yardeni Research Inc. and is known for creating the famous "Fed Model" and "bond vigilante" concepts.

This market forecaster mentioned that the Federal Reserve's 50 basis point rate cut in September was "unnecessary," as it is typically a measure reserved for addressing economic downturns or market crashes, while the U.S. economy is currently thriving with the S&P 500 index nearing record highs.

"They don't need to do more." Yardeni wrote in an email responding to questions. "I think several Fed officials regret cutting rates so much."

Yardeni is not the only one holding such views. Last Friday, former U.S. Treasury Secretary Larry Summers also stated that the Federal Reserve's decision to cut rates by 50 basis points last month was "a mistake," as new data showed that job growth in the U.S. exceeded all expectations last month.

"In retrospect, the 50 basis point rate cut in September was a mistake, although not a major one," Summers said. "The non-farm payroll report confirmed our suspicions about being in a high-neutral rate environment, and responsible monetary policy needs to be cautious in rate cuts," Summers added.

The latest non-farm payroll report also led economists at Bank of America and JPMorgan Chase to abandon their calls for larger rate cuts. They reduced their forecast for the Federal Reserve's rate cut in November from 50 basis points to 25 basis points, in line with changes in the futures contracts related to the outcome of future Federal Reserve meetings.

Michael Feroli, Chief U.S. Economist at JPMorgan Chase, and Aditya Bhave, economist at Bank of America, both noted that the latest non-farm payroll report has constrained their expectations for a more dovish path by the Federal Reserve. Given the Federal Reserve's 50 basis point rate cut in September, they believe a stable job market is a reason for the Federal Reserve to adopt a more cautious approach.

"The non-farm payroll report should also make the Fed's job easier," Feroli wrote in a memo. A "fairly large" unexpected event would need to occur before the next Fed meeting - including key inflation data this week and another employment report in early November - for policymakers to deviate from the "gradual rate hike path."

Bhave from Bank of America stated that the data since the last FOMC rate announcement has been "exceptionally strong," indicating that another 50 basis point rate cut is not necessary Nevertheless, it is not consensus to demand that the Federal Reserve completely pause its actions for the remaining time in 2024. Many investors view the Fed's latest rate cut as a step towards policy normalization.

As the head of US rate strategy at BMO Capital Markets, Ian Lyngen still maintains his prediction of a 25 basis point rate cut in November. He believes that a series of data including employment and inflation will determine the Fed's policy trajectory before the meeting on November 7. He stated that if the October employment report shows relative strength and inflation is proven to be persistent, the Fed may temporarily avoid a rate cut.

"If there is any change, the latest employment report suggests that the Fed may reconsider whether to cut rates in November, although pausing rate cuts is not our base expectation," he wrote in a note to clients. "As we strive to be rational and honest, it is necessary for us to briefly consider what conditions are needed for the Fed to pause rate cuts next month."

Another heavyweight, billionaire investor Stanley Druckenmiller, is concerned that the Fed has already painted itself into a corner regarding future rate cuts. "I hope the Fed won't be trapped by forward guidance as it was in 2021," Druckenmiller said last Friday after the non-farm payroll release. "GDP is above trend, corporate profits are strong, the stock market is hitting all-time highs, credit is very tight, and gold prices are hitting new highs. Where is the restraint?" He further emphasized warnings from other Wall Street figures that the market needs to adjust its expectations for the Fed's pace and extent of easing.

Druckenmiller is skeptical about whether the Fed should choose a 50 basis point rate cut at the recent meeting. BlackRock CEO Larry Fink also stated earlier last week that the market is overly optimistic about the Fed's accommodative policy, citing the strong growth of the US economy.

For those criticizing the Fed's policy shift, the market may have already priced in too many rate cuts. According to Adeney, the risk lies in the fact that additional easing policies will fuel investors' euphoria and pave the way for painful market events.

"Any further rate cuts would increase the likelihood of a scenario similar to the stock market surge of the 1990s," he said. Back then, the S&P 500 index fell by more than a third from its peak to its low point