Major shift in the Fed's hawkish-leaning voting committee: Open to cutting rates by 50 basis points again if job market weakens

Federal Reserve 2024 FOMC voter and Atlanta Fed President Bostic recently stated that if the US labor market weakens and upcoming data shows slower job growth than expected, he would be open to another 50 basis point rate cut by the FOMC. "Unexpected weakness will further prompt me to believe that another aggressive action is truly needed."

Bostic revealed that in the September dot plot, he predicted only one 25 basis point rate cut in addition to the 50 basis point cut in September. However, he stated that his thoughts are open and depend on the speed at which US inflation slows from now on, and more importantly, the description of the labor market conditions in the upcoming employment report. This Friday, the US will release the highly anticipated September non-farm payroll report.

Earlier this year, Bostic stated that he expected no reason to cut rates until later this year, but he supported the significant rate cut in September and expects further cuts this year. Analysts point out that Bostic's latest remarks and his changing views throughout the year highlight the Fed's balanced stance, as officials are increasingly concerned about how quickly the US job market may weaken.

Bostic stated that his baseline prediction is that the Fed will gradually ease monetary policy over the next 15 months, and by the end of 2025, the Fed's policy rate will be maintained at a level of 3%-3.25%, which he believes will have a neutral impact on the US economy. Bostic's expected rate range is 175 basis points lower than the rate level set at the Fed's meeting on September 17-18.

Regarding the PCE data, the Fed's most favored inflation indicator released last Friday, Bostic stated that the biggest takeaway for him was seeing inflation risks continuing to decline:

If inflation continues to decline and the labor market remains strong, I think we can be a little more patient with rate cuts. On the other hand, if the labor market shows signs of weakness, I believe this will increase the urgency for rate cuts.

Bostic said he does not want to fall into a sense of overconfidence, thinking that the path of inflation is short. He pointed out that the core PCE price index, which excludes food and energy costs, was still at 2.7% last month. "It is useful and positive for us to maintain a restrictive stance until more data shows a decline in inflation."

Bostic said that he believes recent inflation data on a month-over-month basis is below the Fed's 2% target, which is positive, and does not see these data as dangerously low or as a sign of prolonged tight monetary policy.

Regarding the labor market, Bostic stated that he will focus on whether the US economy is still creating net job positions, especially if monthly job growth remains at around 100,000 or above, which he believes is the level needed to absorb new entrants into the labor market. "If job growth falls below this level, we will raise another level of questions - does this point to more fundamental issues?"

Bostic revealed that business contacts in his Fed district expect no layoffs. "This does tell me that while the labor market is slowing down, it is not sluggish. If this situation continues, the path to a more neutral rate will proceed orderly to ensure inflation returns to target levels and minimizes disruptions in the labor market Monthly data will tell us to what extent we have achieved this goal, which will guide me on how quickly we need to take action."

Following remarks by Bostic on the possibility of another 50 basis point rate cut by the FOMC, significant buying interest was seen in SOFR futures. Just 1 minute after Bostic's speech, trading volume surged, with the majority of trades coming from the March 2025 contract, including 9,373 contracts at a price of 96.550 and 10,627 contracts at a price of 96.555. The total trading volume within one minute was approximately 20,000 contracts, the highest volume to date.

However, short-term US Treasury bonds were not significantly affected, with the 2-year Treasury bond yield falling by about 1 basis point from 3.605% to 3.595%