The Federal Reserve continues to advance interest rate normalization. A 25 basis point rate cut each time remains the main expectation for investors

According to the Wise Finance APP, the inflation report for September released on Thursday will prompt the Federal Reserve to continue advancing the process of interest rate normalization. With a healthy labor market and price growth close to the target, Federal Reserve officials are determined to return to a monetary policy stance that neither stimulates nor hinders the U.S. economy. They believe there is still ample time to achieve this goal.

Currently, the market generally expects the Federal Reserve to take small rate cut measures in the upcoming meetings, with a 25 basis point cut each time still being the main expectation among investors.

Although recent data has not fully proven that the U.S. economy will achieve a "soft landing," the possibility of this is increasing. Employment positions continue to increase monthly, and although the unemployment rate has risen compared to last year, the average unemployment rate over the past three months remains at a low level of 4.2%. It is expected that the actual GDP growth rate in the third quarter will be around 3% on an annualized basis.

The Consumer Price Index (CPI) for September released by the U.S. Bureau of Labor Statistics on Thursday morning showed that price increases exceeded expectations. The core price index, excluding food and energy, rose by 0.3% for the second consecutive month, with a year-on-year increase of 3.3%. The monthly increase of about 0.17% is consistent with the Federal Reserve's annual inflation target of 2%.

However, policymakers are not panicking. The Federal Reserve's preferred inflation measure, the Personal Consumption Expenditures Price Index (PCE), has different weights for different price categories, especially with a lower weight on housing costs, which has kept the PCE index performance lower than the CPI this year.

The PCE price index data for September will be released on October 31, just a week before the Federal Reserve's interest rate decision in November. According to the consensus of economists surveyed by FactSet, the core PCE index is expected to rise by 0.2% month-on-month and by 2.5% year-on-year in September.

Although this number is still above the target, it has significantly decreased from nearly 4% last year. Even as the Federal Reserve gradually lowers interest rates, they will remain in a "restrictive" range over the next few quarters, exerting further downward pressure on inflation until it approaches the 2% target.

New York Fed President Williams said on Thursday, "We have taken and maintained a very tight monetary policy stance until the data gives us confidence that inflation is steadily moving towards the 2% target." He added, "As we make progress towards price stability, gradually transitioning to a more neutral monetary policy stance will help maintain a strong economy and labor market."

"Neutral rate" refers to a theoretical level that neither stimulates nor suppresses economic activity. According to the minutes of the Federal Reserve policy meeting on September 17-18 released on Wednesday, officials discussed targeting the neutral rate for medium to long-term rate cuts. At that meeting, the Federal Reserve lowered the federal funds rate target range by 0.5 percentage points to a range of 4.75% to 5.0%, which had been unchanged since July 2023.

Many economists believe that the neutral federal funds rate for the U.S. economy should be between 2% and 3%, while Federal Reserve officials indicated in their September economic forecast update that they expect to cut rates by 100 basis points this year and another 100 basis points by the end of 2025, thereby lowering the target range to 3.25% to 3.5% Policy makers forecast a median federal funds rate of 2.9%.

Unless inflation accelerates significantly, the mild data released on Thursday alone is not enough to prompt the Federal Reserve to pause rate cuts, especially when rates are still well above what they consider the neutral level.

In addition, policymakers are also focusing on maximizing employment as part of their dual mandate, indicating that these goals are currently balanced. Recent data does not call for faster rate cuts to rescue the labor market, although it appears to be cooling. This suggests that the significant rate cut in September may have been a one-off unless there is a faster deterioration.

Initial claims for unemployment benefits surged to the highest level in 14 months, reaching 258,000 people for the week ending October 5, up from 225,000 the previous week, with continued claims also rising. This is not a reassuring sign for the labor market, but these increases are likely related to Hurricane Helen affecting much of the southeastern United States.

Several Fed officials have expressed their desire to keep the U.S. economy in its current state and believe that a gradual rate-cutting process is the way to achieve this goal. This indicates that moderate rate cuts may continue in the coming months