"The Federal Reserve's megaphone" latest news: A 25 basis point rate cut this week is almost a certainty

Ahead of this week's Federal Reserve meeting, Nick Timiraos, a journalist known as the "Fed Whisperer" for The Wall Street Journal, published a new article. Below is the full content.

As inflation continues to move toward the 2% target, the Federal Reserve is expected to lower interest rates by 25 basis points at its meeting later this week.

Federal Reserve officials initiated a loosening cycle with a significant rate cut of 50 basis points at the last meeting in September. They are trying to determine where interest rates should stabilize after a series of large rate hikes due to high inflation over the past three years.

Loretta Mester, who retired in June after serving as president of the Cleveland Fed for 10 years, said, "We are entering a new phase: over time, policy will become less restrictive as the Fed gains more confidence in the direction of inflation, believing it will return to 2%."

This week's meeting is not expected to be as suspenseful as the last one, where the market speculated on the scale of the Fed's first rate cut in four years. Officials hope to avoid the spotlight, as this meeting concludes two days after the presidential election, and the Fed strives to maintain its independence.

The elections on Tuesday also prompted the Fed to push the meeting back by one day. The Fed typically concludes its two-day meetings on Wednesday at Eastern Time, but this time it will end on Thursday.

While this week's meeting may lack drama, officials may face tricky debates in the coming months. First is the decision on what level interest rates should be set. Secondly, although the election results will not affect this week's policy decisions, any policy changes by the next president and Congress that reshape the economic outlook could also alter the Fed's rate path.

Strong Consumption, Weak Hiring

Policymakers are grappling with a stubborn economic puzzle, which may determine whether they feel pressure to slow down or accelerate rate cuts in the coming months. The question is: the labor market continues to show signs of cooling, but consumer spending has remained solid.

Economic data released last week put an exclamation point on this mystery. From July to September, the U.S. economy grew at a robust annualized rate of 2.8%, driven by consumer spending, which has exceeded expectations over the past year. Some economists point out that this resilience suggests the Fed's rate stance may not be as tight as some officials believe.

Meanwhile, demand for labor is steadily cooling. In 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. While the unemployment rate remained stable at 4.1% last month, the proportion of workers permanently laid off rose to its highest level this year, one of several signs indicating reduced demand for workers.

It remains unclear how long stable consumption and a cooling labor market can last.

In one scenario, stronger consumer spending will continue to help stabilize the labor market, as it will maintain steady demand for workers. In this more optimistic scenario, the recent cooling in the labor market will reflect a normalization post-pandemic, allowing the Fed to reduce the extent of rate cuts A more ominous situation is that further weakness in income growth may drag down consumer spending in the coming months, making the economy more susceptible to a slowdown and potentially requiring the Federal Reserve to cut interest rates further.

Brighter Income Prospects

Federal Reserve officials are also groping through a fog of unstable data that is revised every month. Several officials believe that a significant rate cut in September was appropriate as inflation has clearly declined.

Before that meeting, the unemployment rate had risen to 4.3% in July, and wage growth had slowed. At that time, consumers seemed to be spending their savings to drive economic growth.

However, revisions to government data after the meeting showed that income growth was stronger than initially reported. As a result, the personal savings rate was adjusted upward, indicating that consumers are not as cash-strapped as previously thought. Federal Reserve Chairman Jerome Powell stated at a meeting on September 30 that this revision "eliminated the downside risks to the economy," adding that "these are very large and healthy revisions."

Powell noted that robust data on economic activity might reassure officials to some extent that the economy has not deteriorated. However, he stated that labor market data has historically provided a "better real-time picture of the economy" than GDP data. He remarked that strong economic activity data "will not prevent us from very carefully examining labor market data."

"Unreliable" Data

Before the Federal Reserve's meeting in September, the Labor Department reported that job growth in July and August was stronger than expected, and wage growth in September was unusually strong. This led to speculation that the Federal Reserve might need to consider slowing the pace of future rate cuts.

However, the Federal Reserve subsequently received two shocking labor market reports. Employment data for August and September was revised downward. Additionally, job growth in October was far weaker than expected, partly due to strikes and hurricanes.

In preparation for this week's meeting, officials warned against completely rethinking their interest rate outlook based on any single monthly report.

Atlanta Fed President Raphael Bostic stated in an interview last month, "I've been saying we should expect the data to be 'unreliable' (janky) and may bounce back. We may receive 'unreliable' reports from time to time, and the question is, 'Do they signal a new trend?'"

The Federal Reserve may continue to cut rates by 25 basis points this week, partly because they are trying to formulate policy based on the expectation that inflation will continue to decline. With falling energy and commodity prices, inflation has slowed over the past year. Many officials no longer view the labor market as a source of inflation, as wage growth is cooling.

Officials often emphasize that their decisions "depend on data," meaning they will update their interest rate outlook as economic forecasts change. San Francisco Fed President Mary Daly said in an interview last month, "'Data dependence' does not mean 'data stress'; employment data is constantly revised and fluctuates, which is a good lesson telling us why we cannot rely on data points." Bostic said that in such an environment, the right approach is to "stay patient" and "accept volatility before formulating strategies and figuring out where things should go."