Eagerly anticipating! Investors continue to hope that Powell can "make a definitive decision"

Investors are anticipating that Federal Reserve Chairman Jerome Powell will lower interest rates by 25 basis points this week to keep the rate cut plan on track, despite some stubborn signs of inflation and mixed signals regarding the labor market.

JPMorgan's chief economist Michael Feroli stated in a report, “This week’s FOMC meeting is a refreshingly straightforward decision, and the rationale for a rate cut remains valid.”

However, this does not mean that discussions among Federal Reserve officials on Wednesday and Thursday will go smoothly. Fed policymakers will have to interpret recent data indicating a strong economy, persistent inflation, and a chaotic labor market disrupted by weather and worker strikes. This could lead to a debate among officials hoping for a rate cut, those supporting a pause, or those advocating for a rate cut while simultaneously using language aimed at conveying a slower pace of future cuts.

Fed watchers expect that Powell will reach a consensus around a modest rate cut following a significant cut in September.

EY's chief economist Gregory Daco stated, “We hope that Fed Chairman Powell will once again be the voice of reason, guiding the FOMC to cautiously ease monetary policy.”

Wilmington Trust's chief economist Luke Tilley, who also expects the Fed to cut rates by 25 basis points this week, added, “I don’t think there are many factors that have changed people’s views.”

Traders are pricing in nearly a 100% probability of a 25 basis point rate cut, with the Fed forecasting two more modest cuts for the remainder of 2024.

Former Kansas City Fed President Esther George stated that pausing rate cuts in November would be hard to accept.

In an interview, George said, “If they skip this meeting, what’s the explanation? Given that they made a significant cut of 50 basis points in September, you really need to have a story to explain why you would skip the meeting or why you want to slow down the pace of cuts.”

George expects the Fed to cut rates by 25 basis points this week and predicts that Powell will explain in the post-meeting press conference that the Fed decided to cut rates in the face of a strong economy to maintain that performance, echoing Powell's comments on September 30.

George stated, “What I think we will hear is: ‘We want to keep it this way; we don’t want to see the economy slow down.’”

Complex Factors

The latest inflation data favored by the Fed may create some divisions among policymakers.

The good news is that the Personal Consumption Expenditures (PCE) index shows that inflation rose 2.1% year-on-year in September, close to the Fed's 2% target. However, the complexity lies in the fact that the core PCE, which the Fed is more concerned about, continues to maintain a year-on-year growth rate of 2.7%, remaining unchanged for three consecutive months rather than declining.

This new data, along with another higher-than-expected CPI data, may provide more support for arguments made by hawkish FOMC members that any future rate cuts should be gradual and cautious. The only FOMC member who disagreed with the rate cut in September, Bowman, held her opposing view because she is concerned that inflation has not yet been fully controlled.

Another complex factor facing policymakers is that their view of the labor market has become unclear due to the latest labor report, which showed that only 12,000 jobs were created in October, partly due to temporary impacts from two hurricanes and a strike by Boeing aircraft manufacturers. The shorter survey period also affected the data due to calendar reasons.

The unemployment rate remained stable at 4.1%, which suggests that the weak wage growth for the month is a short-term phenomenon, and new job additions are expected to rebound next month.

However, market observers are struggling to determine whether this report still reveals an overall deterioration in the labor market beyond the cumulative effects of the hurricanes and the strike, especially after the downward revision of September's growth.

Bill Adams, chief economist at Comerica Bank, stated, “The one-time shock in October makes it difficult for us to assess whether the labor market is changing direction this month, but the downward revision of September's job growth indicates that the labor market had been cooling before these shocks occurred.”

Tilley from Wilmington Trust hopes to extract a clearer picture of the labor market from the initial jobless claims, noting that this data is now “very stable,” with no signs of permanent layoffs.

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

However, Tilley does see that more people are entering the labor market, which has led to a slowdown in hiring.

Tilley said, “This could be vicious. If those looking for jobs cannot find work... then they won’t spend as much money, or they won’t pay those bills.”

Some Federal Reserve observers believe that the Fed will cut rates in November and then pause in December, noting that the economy is still growing at about 3%.

They also indicated that Fed officials may revise their rate cut predictions in December, showing that the pace of future cuts is expected to be smaller than anticipated a few months ago.

However, they added that this month, the Fed does not want to cause any surprises less than 48 hours before the U.S. presidential election voting ends.

Tilley from Wilmington Trust stated, “When the Fed meets, they might still be counting ballots. They would prefer to cut rates, keep a low profile, and not say anything new.”