"The New Federal Reserve News Agency": This week's interest rate cut is "not dramatic," but the Federal Reserve's challenges lie ahead

The Federal Reserve's decision to cut interest rates by 25 basis points this week is almost a foregone conclusion, but conflicting and unstable economic data, along with policy uncertainty following the election, have made the future path of rate cuts full of variables.

Two days after the U.S. election concludes, on Thursday local time (Friday early morning Beijing time), the Federal Reserve will announce its November interest rate decision. Currently, the market expects the Federal Reserve to cut rates by 25 basis points, lowering the rate from 4.75%-5% to 4.5%-4.75%.

It is worth mentioning that this election has delayed the Federal Reserve's meeting by one day; the Fed typically concludes its two-day meeting on Wednesday, but this time it will end on Thursday.

On November 3rd, Nick Timiraos, a reporter for The Wall Street Journal, known as the "new Federal Reserve correspondent," stated in a recent article that compared to the suspense of whether to cut rates by 25 or 50 basis points in September, this week's meeting should be "uneventful," as it closely follows the U.S. presidential election. The Federal Reserve hopes to avoid becoming the center of attention and strives to maintain its "non-political DNA."

However, Timiraos noted that the Federal Reserve faces tricky issues in the coming months, including deciding what level interest rates should stabilize at, and any policy changes by the next president that reshape the economic outlook could affect the rate path. Additionally, conflicting and constantly revised economic data have increased the "dilemma" for the Federal Reserve.

Conflicting Data: Weak Employment, Strong Consumption

While inflation continues to ease, the U.S. labor market shows signs of cooling, but consumer spending remains robust.

Data released last week indicated that the U.S. economy grew steadily at an annualized rate of 2.8% in the third quarter, with consumption particularly strong, as the 3.7% quarter-on-quarter growth in consumer spending marked the highest in six quarters.

At the same time, there are renewed signals of cooling in the labor market. Over the three months ending in October, the private sector added an average of only 67,000 jobs per month, the lowest level since the pandemic began in 2020. Although the unemployment rate remained stable at 4.1% last month, the proportion of workers permanently laid off rose to its highest level this year.

Timiraos stated that it is currently unclear how long the trend of stable consumption and a cooling labor market can last:

In one scenario, stronger consumer spending will continue to help stabilize the labor market. In this more optimistic scenario, the recent cooling of the labor market will reflect a normalization post-pandemic, allowing the Federal Reserve to reduce the frequency of rate cuts.

In a less optimistic scenario, further weakening of income growth could put pressure on consumer spending in the coming months, making the economy more susceptible to a slowdown and potentially requiring further rate cuts.

Data Constantly Being Revised

Federal Reserve officials often emphasize that their decisions are "data-dependent," meaning they will update their rate outlook as their economic forecasts change.

However, the problem is that U.S. economic data is constantly being significantly revised, leading to substantial fluctuations in market expectations for Federal Reserve rate cuts Before the Federal Reserve's first interest rate cut in September, data showed that the unemployment rate in the U.S. rose in July, and wage growth slowed. However, revised data after the meeting indicated that income growth was stronger than initially reported.

Last month, the U.S. Department of Labor reported that job growth in July and August exceeded expectations, and wage growth in September was unusually strong, leading the market to anticipate that the Federal Reserve might need to consider slowing the pace of future rate cuts.

However, by last week, the number of new jobs added in previous months was significantly revised downwards: August's new jobs were revised down by 8,000 (from 159,000 to 78,000), and September was revised down by 31,000 (from 254,000 to 223,000). After these revisions, the total number of new jobs added in August and September was revised down by 112,000.

Data released simultaneously showed that due to two hurricanes and a Boeing strike, the U.S. non-farm payrolls in October plummeted to 12,000, casting a gloomy outlook on the labor market.

Federal Reserve officials have warned against making significant adjustments to their interest rate outlook based solely on any single monthly report.

Mary Daly, President of the San Francisco Federal Reserve, stated in an interview last month, “‘Data dependence’... does not mean ‘data reaction’... Employment market data is constantly revised and erratic, which is a good lesson on why we cannot rely on data points.”

Raphael Bostic, President of the Atlanta Federal Reserve, also mentioned that in such an environment, the correct approach is to “be patient, accept volatility, strategize, and figure out how things will unfold.”