Thoughts

November 01, 2024 | 14:37

Fed's Rate Cut Campaign to Continue

Economist

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

Michael Gregory , CFA

Deputy Chief Economist and Managing Director
Economics

Michael is part of the team responsible for forecasting and analyzing the North American economy and financial m... (Read more)

We look for the FOMC to cut policy rates by 25 bps on November 7, with the target range for the fed funds rate falling to 4.50%-to-4.75%. The market is currently pricing almost full odds (92%) of a quarter-point move. Before, in the immediate wake of mid-September’s surprise 50 bp rate reduction, which kicked off the easing campaign, the market was betting better-than-even odds (56%) of a ‘follow-up-50’ for next meeting. Then, as the subsequent parade of economic indicators boasted some upbeat floats, the market pared its rate cut expectations.

We figure the tone to the post-September 18 data has been more of a bother for the market than for the Fed. Recall it was back at Jackson Hole that Chair Powell first alerted that the Committee did “not seek or welcome further cooling in labor market conditions” and, by extension, in the broader economy. Although inflation’s last mile to the 2% goal was going to be a “bumpy ride”, further labour market and economic slackening and slowing was no longer required to arrive at the target. By design (i.e., August 2020’s alteration of the monetary framework), Fed policy has become more sensitive to unnecessary labour market weakening.

How much more sensitive? After the Fed kept policy unchanged on July 31, the ‘weak’ employment report for July released two days later convinced policymakers that the risk of unnecessary deterioration in labour market conditions had become unacceptably high. Although August’s employment report fared better, this set the stage for the Fed’s inaugural 50 bp rate cut.

This was a profound move. The last two times the Fed began an easing campaign with 50 bps, there was a financial crisis unfolding (the Global Financial Crisis in 2007 and the ‘tech wreck’ in 2001). Powell labelled the action a “recalibration”, which we took to mean a ‘catch up’ given the unexpected ratcheting up of the downside risks to the economic outlook between meetings.

As for the tone of the data since the last policy confab, we suspect the FOMC is content to see the jobless rate back at 4.1% for September and October, just barely below its median projection of the longer-run level (4.2%). It was the spike to 4.3% for July that set off the alarm. October’s measly (12k) growth in payrolls will likely be dismissed owing to weather and labour disruptions, although the net 112k downgrade to August and September will register a bit.

Real GDP growth running at an above-potential 2.8% annualized clip in Q3 is likely a little irking given the stubbornness of September’s core and supercore inflation readings (both 0.3% which lifted the three-month trends). Although, the latter will likely be interpreted (for now) as one of those proverbial ‘bumps’ on the road to price stability. On balance, there’s nothing here to dissuade the Fed from cutting another 25 bps or persuade that it should be a bigger move.

These data and policy nuances will no doubt be covered in Chair Powell’s press conference. However, we suspect the media folks may be more interested in the Fed’s take on the election. On this front, we expect to see Powell’s deflecting and obfuscating skills in full display.