Central bank not likely to change its mind even with two key data points and presidential election coming before their meeting, economists said
Federal Reserve officials, following their internal guidelines, have gone silent to prepare for their interest-rate policy meeting on Nov. 7.
Based on the speeches from Fed officials over the past six weeks, economists expect the central bank to lower its benchmark interest rate by a quarter percentage point to a range of 4.5%-4.75%. Analysts don't expect any of the data, including key data points like the September PCE inflation report and an October jobs report due to be published this coming week, to sway them from this path.
"I think the signals we've gotten from Fed officials are kind of all broadly consistent with [a quarter-point cut]," said Matthew Luzzetti, chief U.S. economist at Deutsche Bank in New York.
Most Fed officials have advocated for a deliberate or gradual pace of rate cuts, he noted.
Tim Duy, chief economist at SGH Macro Advisors, agreed. "I think they are going to cut by 25 basis points," he said.
Fed-funds futures are showing that a quarter-point cut is almost fully priced in, with a 95.7% probability of a quarter-point cut.
The Fed will get to look at the September personal-consumption-expenditure inflation data next Thursday and the October jobs report next Friday before they meet.
In other circumstances, the data might impact their decision, but this year, officials are likely to not be swayed, Luzzetti said.
Why a quarter-point cut?
Comments from policymakers suggest that there's a good deal of agreement about the themes in the incoming data, said
"The focus remains on preserving a strong labor market alongside a continuing moderation in inflation, and with respect to both inflation and the labor market the relevant story in the data, if not necessarily the very latest data points, is one of ongoing slowing," he said.
Officials have said that interest rates are "restrictive," meaning they are acting as a brake on the economy. This isn't as necessary now given that inflation has cooled and Fed doesn't want to unnecessarily damage the labor market.
Fed officials see the labor market as slowing and think their policy rate is still "restrictive" or putting a brake on demand.
The October jobs data is expected to be messy given the two devastating hurricanes that struck the southeast and won't be very useful.
"I don't think that they're going to be very sensitive to this next employment report," said Duy.
Kathy Bostjancic, chief economist for Nationwide, said she is forecasting 100,000 jobs were added in October, subtracting 36,000 jobs for the Boeing Co. strike and 60,000 fewer jobs due to the hurricanes.
The 100,000 estimate is also the median forecast of economists surveyed by the Wall Street Journal.
"It's going to be much more difficult to get a handle on employment unless its extremely weak or extremely strong," Bostjancic said.
And finally, the Fed doesn't want to go through the communications issues that arose at its meeting in September, Luzzetti said.
Prior to the September meeting, the market thought Fed officials had settled on a quarter-point cut.
But then the Financial Times and Wall Street Journal carried reports, seen as at least inspired by the Fed, that the pending decision between a potential quarter-point or half-point cut was "a close call." Ultimately the Fed agreed to a more aggressive half-point cut.
Could the Fed cut again by a half point? Economists don't view this as likely because data since the last meeting has been stronger than expected.
"The payroll numbers came in stronger than expected, Consumer data came in stronger than expected. Inflation came in hotter than expected," said Lindsey Piegza, chief economist for Stifel Financial.
Could the Fed pause its rate cutting campaign? That is also seen as unlikely.
"Nobody has pushed for skipping a cut at an upcoming meeting as part of pursuing a more gradual approach to cuts going forward," said Kevin Burgett, an economist at LH Meyers, in a note to clients.
Fed officials will also have the results of the November 5 presidential election before they meet. Instead of the traditional Tuesday and Wednesday meetings, the FOMC shifts its November meeting during election years until Wednesday and Thursday.
Luzzetti said he didn't think the presidential election would cause the Fed to veer from a quarter-point cut on Nov. 7. Any impact of the economy from a new administration won't be clear until 2025, he said.
Economists agree that the path ahead for the Fed gets harder after November.
Continued strong economic reports will raise questions about how restrictive Fed policy actually is.
Duy said he expects Powell to lean on the Fed's own forecast at his press conference in November, saying the Fed's economic projections see another quarter-point cut in December and the Fed will look at the data before deciding.
"I don't think the Fed is going to dove it up or hawk it up," Duy said.
At the moment, fed-funds futures indicate a 22.3% chance of a pause in December.
Piegza of Stifel said she wouldn't rule out the data having some impact on the Fed's decision.
"I think 50bp is off the table. I think 25bp is the base case but a significantly stronger employment report, coupled with PCE inflation could push the needle towards skipping November," she said.
-Greg Robb
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