The Federal Reserve hopes to gradually cut interest rates, Wall Street: Hurry up!

Both the Federal Reserve and Wall Street believe that the recent 50 basis point rate cut is just the beginning, but there is a difference of opinion on the speed at which interest rates should be lowered.

Federal Reserve policymakers insist on continuing to lower rates slowly and steadily. Meanwhile, the market seems to bet that the deteriorating economic conditions will force the Federal Reserve to act more quickly. Data will prove whose view is correct.

With the significant rate cut in September already completed, and in the absence of a recession, the Federal Reserve does not need to act hastily. The terminal rate for rate cuts is the neutral rate level, which is a rate level that neither stimulates nor restricts economic growth. The so-called "dot plot" median forecast in September indicates a total rate cut of 100 basis points this year, and another 100 basis points by the end of 2025, bringing the target range to 3.25% to 3.5%.

Federal Reserve Governor Kugler said, "While future actions will depend on the data we receive on inflation, employment, and economic activity, if conditions continue to evolve in the current direction, further rate cuts would be appropriate."

The long-term median forecast for the federal funds rate in the September economic forecast summary has risen for the third consecutive quarter, approaching 3%. This is considered the committee's collective estimate of the neutral rate, with most economists estimating the neutral rate to be around 3%.

Atlanta Federal Reserve President Bostic said, "There is much debate about the neutral rate level in the United States and elsewhere. However, the disagreement on the true neutral level is not important to me. Regardless of what the neutral rate is, I don't know who would reasonably argue that we are far from it."

Overall, FOMC members expect to achieve a soft landing. The median forecast in the September economic forecast summary shows that the actual GDP growth rate will be 2% annually until 2027, with a peak unemployment rate of only 4.4%.

Not all Federal Reserve officials believe that the task of fighting inflation is complete. Federal Reserve Governor Bowman cast the only dissenting vote on September 18, leaning towards a 0.25% rate cut. She mentioned the risks of an inflation rebound in the coming months.

Bowman said on Tuesday, "In my view, the upside risks to inflation remain prominent, with global supply chains still vulnerable to labor strikes and escalating geopolitical tensions, which could lead to inflationary effects in food, energy, and other commodity markets. Expansionary fiscal spending could also bring inflation risks, given the long-standing supply constraints, especially as demand for affordable housing increases, which could also pose inflation risks."

The next FOMC meeting will be held on November 6th and 7th, just a few days after the U.S. election.

Matthew Luzzetti, Chief U.S. Economist at Deutsche Bank, wrote on Wednesday, "While the overall picture of the data is always important, the newly released labor market data will need to provide greater confidence to confirm the Federal Reserve's trend towards stabilization."

Therefore, there are two dates to watch out for: October 4th, when the September employment data will be released; and November 1st, the release date for the October employment report, which falls during the pre-FOMC meeting blackout period Lu Zeti believes that if the unemployment rate exceeds the FOMC's year-end median forecast of 4.4% in the September dot plot, and non-farm payroll growth remains at 100,000 or lower per month, then discussing another 50 basis point rate cut in November will be on the table. Further downward revisions to the initially reported hiring numbers could provide additional reasons to expedite the rate cut.

This is exactly what the market is betting on. Federal funds futures pricing on Wednesday indicates a 60% probability of another 50 basis point rate cut on November 7, with the remaining probability supporting a smaller rate cut. Pricing also suggests that the number of rate cuts in 2025 will exceed the Fed's baseline scenario assumptions.

Unfortunately, Wall Street does not have voting rights at the FOMC