The Federal Reserve appears set to deliver another significant interest rate cut in November, spurred by a cooling inflation rate and concerns over a softening U.S. labor market. As inflation edges closer to the central bank’s 2% target, traders are betting on a 50-basis-point reduction in the federal funds rate, following last week’s half-point cut.
In a recent report from the Commerce Department, inflation measured by the personal consumption expenditures (PCE) price index rose by 2.2% in August, marking significant progress toward the Federal Reserve’s inflation target. This data aligns with Fed Chair Jerome Powell's comments during his post-meeting press conference last week, in which he justified the decision to lower the policy rate by 50 basis points. Powell pointed to the still-resilient labor market but highlighted the need for further cuts to support the economy as it navigates a period of slowing growth and cooling price pressures.
"If the Fed wants to cut by another 50 basis points in November, the inflation data isn't going to stand in their way," said Omair Sharif, president of Inflation Insights. According to Sharif, the faster inflation cools, the more urgency there is for the Fed to reduce rates to neutral levels. This neutral rate, estimated to be just above the 3.00%-3.25% range, represents the level at which interest rates neither stimulate nor suppress economic growth.
Market Betting on Further Cuts
Following the release of the latest inflation report, interest rate futures contracts now reflect a 54% probability of a half-point cut in November, up from 46%. Either way, traders expect the Fed to reduce rates by a total of 75 basis points by the end of the year, signaling further monetary easing to come.
The potential for additional cuts is supported by underlying inflation trends. Stripped of volatile food and energy components, the core PCE index has been rising at an annual rate of less than 1.8% over the past four months, according to the August data. This figure is considerably below previous levels and reflects the Fed's success in taming price pressures. However, some policymakers, including Fed Governor Chris Waller, have expressed concerns that inflation may be easing too quickly.
Waller, who supported the Fed's decision to lower rates last week, noted that inflation has softened faster than expected. He pointed to the August core PCE inflation increase of 0.13%, which was lower than anticipated. "That is what put me back a bit to say, 'wow, inflation is softening much faster than I thought it was going to,'" Waller remarked.
Diverging Views Among Fed Policymakers
While the majority of Federal Reserve officials appear to support further rate cuts, the central bank is not without its internal disagreements. Last week’s decision to reduce the federal funds rate to the 4.75%-5.00% range was not unanimous. Fed Governor Michelle Bowman dissented, favoring a smaller quarter-point reduction instead.
Bowman argued that core inflation, despite easing, remains "uncomfortably above" the Fed's 2% target. Core PCE inflation, a key measure closely monitored by policymakers, edged higher to 2.7% in August, up from 2.6% in July. This rise may indicate that inflation, while slowing, could still pose challenges for the Fed’s long-term objectives.
Bowman's dissent underscores the complexities of monetary policy during this period of transition. With inflation showing signs of easing, some policymakers, including Bowman, remain cautious about adopting aggressive rate cuts. However, the Fed’s broader focus is increasingly shifting toward the labor market, where signs of weakness are becoming more pronounced.
The Job Market in Focus
In addition to inflation concerns, the labor market has become a central factor in the Federal Reserve’s rate decisions. Fed Chair Powell has highlighted growing risks to employment, emphasizing the need to monitor labor market conditions closely. "There are many, many employment indicators, and what do they say? They say this is still a solid labor market," Powell stated, referencing the current 4.2% unemployment rate, which remains below the long-term U.S. average.
Despite this, Powell noted that several aspects of the job market are showing signs of softening. The unemployment rate has been gradually rising and is expected to reach 4.4% by the end of 2024, a full percentage point higher than the lows seen in 2023. Powell's concerns are also reflected in the relationship between job openings and unemployment. The Fed has observed that the labor market is loosening, primarily through a reduction in job openings rather than outright job losses. However, Powell warned that this trend could soon reverse, with further declines in job openings potentially leading to higher unemployment.
Evidence of a weakening labor market may further nudge the Federal Reserve toward more aggressive rate cuts. The upcoming September jobs report, due on October 4, will provide crucial insights into the state of employment and may influence the Fed's decisions at its next policy meeting on November 6-7.
Housing Market and Broader Inflation Trends
The August inflation data also provided additional insights into sector-specific price pressures. One of the key areas of concern remains housing, where price increases have been slower to moderate compared to other sectors. According to Atlanta Fed President Raphael Bostic, housing is one of the last holdouts of elevated inflation. "The breadth of price increases is narrowing to a range that accords with price stability," Bostic said after the Fed’s September 17-18 meeting.
Bostic’s analysis showed that the share of goods increasing at an annual rate of 5% or greater has fallen to 18%, the lowest level since 2020. This is comparable to the long-term average of 17%. However, the housing sector remains a challenge, with prices still rising at a rate higher than the Fed would like. As housing price growth continues to slow, Bostic suggested that the Fed will gain more confidence in its ability to keep inflation in check.
The broad-based easing of inflation, combined with signs of a weakening labor market, has led many market participants to expect a continued reduction in interest rates. While Fed officials have cautioned against overreacting to short-term data, the overall trend points to a more dovish policy stance in the months ahead.
Fed’s Path Forward
Looking ahead, the Federal Reserve faces a delicate balancing act as it navigates both cooling inflation and a softening labor market. The central bank’s primary goal remains to achieve price stability without undermining employment. Powell has repeatedly emphasized the importance of maintaining flexibility in monetary policy, ensuring that the Fed can respond quickly to evolving economic conditions.
As inflation approaches the Fed's 2% target, the pace and magnitude of future rate cuts will depend largely on labor market data and other economic indicators. The November policy meeting is expected to set the tone for the remainder of the year, with many traders betting on at least one more significant rate cut before 2024.
Ultimately, the Fed’s ability to strike the right balance between controlling inflation and supporting the labor market will determine the success of its current monetary policy. With inflation cooling and the job market softening, the central bank’s next moves will be crucial in shaping the trajectory of the U.S. economy in the coming months.
(Source:www.reuters.com)
In a recent report from the Commerce Department, inflation measured by the personal consumption expenditures (PCE) price index rose by 2.2% in August, marking significant progress toward the Federal Reserve’s inflation target. This data aligns with Fed Chair Jerome Powell's comments during his post-meeting press conference last week, in which he justified the decision to lower the policy rate by 50 basis points. Powell pointed to the still-resilient labor market but highlighted the need for further cuts to support the economy as it navigates a period of slowing growth and cooling price pressures.
"If the Fed wants to cut by another 50 basis points in November, the inflation data isn't going to stand in their way," said Omair Sharif, president of Inflation Insights. According to Sharif, the faster inflation cools, the more urgency there is for the Fed to reduce rates to neutral levels. This neutral rate, estimated to be just above the 3.00%-3.25% range, represents the level at which interest rates neither stimulate nor suppress economic growth.
Market Betting on Further Cuts
Following the release of the latest inflation report, interest rate futures contracts now reflect a 54% probability of a half-point cut in November, up from 46%. Either way, traders expect the Fed to reduce rates by a total of 75 basis points by the end of the year, signaling further monetary easing to come.
The potential for additional cuts is supported by underlying inflation trends. Stripped of volatile food and energy components, the core PCE index has been rising at an annual rate of less than 1.8% over the past four months, according to the August data. This figure is considerably below previous levels and reflects the Fed's success in taming price pressures. However, some policymakers, including Fed Governor Chris Waller, have expressed concerns that inflation may be easing too quickly.
Waller, who supported the Fed's decision to lower rates last week, noted that inflation has softened faster than expected. He pointed to the August core PCE inflation increase of 0.13%, which was lower than anticipated. "That is what put me back a bit to say, 'wow, inflation is softening much faster than I thought it was going to,'" Waller remarked.
Diverging Views Among Fed Policymakers
While the majority of Federal Reserve officials appear to support further rate cuts, the central bank is not without its internal disagreements. Last week’s decision to reduce the federal funds rate to the 4.75%-5.00% range was not unanimous. Fed Governor Michelle Bowman dissented, favoring a smaller quarter-point reduction instead.
Bowman argued that core inflation, despite easing, remains "uncomfortably above" the Fed's 2% target. Core PCE inflation, a key measure closely monitored by policymakers, edged higher to 2.7% in August, up from 2.6% in July. This rise may indicate that inflation, while slowing, could still pose challenges for the Fed’s long-term objectives.
Bowman's dissent underscores the complexities of monetary policy during this period of transition. With inflation showing signs of easing, some policymakers, including Bowman, remain cautious about adopting aggressive rate cuts. However, the Fed’s broader focus is increasingly shifting toward the labor market, where signs of weakness are becoming more pronounced.
The Job Market in Focus
In addition to inflation concerns, the labor market has become a central factor in the Federal Reserve’s rate decisions. Fed Chair Powell has highlighted growing risks to employment, emphasizing the need to monitor labor market conditions closely. "There are many, many employment indicators, and what do they say? They say this is still a solid labor market," Powell stated, referencing the current 4.2% unemployment rate, which remains below the long-term U.S. average.
Despite this, Powell noted that several aspects of the job market are showing signs of softening. The unemployment rate has been gradually rising and is expected to reach 4.4% by the end of 2024, a full percentage point higher than the lows seen in 2023. Powell's concerns are also reflected in the relationship between job openings and unemployment. The Fed has observed that the labor market is loosening, primarily through a reduction in job openings rather than outright job losses. However, Powell warned that this trend could soon reverse, with further declines in job openings potentially leading to higher unemployment.
Evidence of a weakening labor market may further nudge the Federal Reserve toward more aggressive rate cuts. The upcoming September jobs report, due on October 4, will provide crucial insights into the state of employment and may influence the Fed's decisions at its next policy meeting on November 6-7.
Housing Market and Broader Inflation Trends
The August inflation data also provided additional insights into sector-specific price pressures. One of the key areas of concern remains housing, where price increases have been slower to moderate compared to other sectors. According to Atlanta Fed President Raphael Bostic, housing is one of the last holdouts of elevated inflation. "The breadth of price increases is narrowing to a range that accords with price stability," Bostic said after the Fed’s September 17-18 meeting.
Bostic’s analysis showed that the share of goods increasing at an annual rate of 5% or greater has fallen to 18%, the lowest level since 2020. This is comparable to the long-term average of 17%. However, the housing sector remains a challenge, with prices still rising at a rate higher than the Fed would like. As housing price growth continues to slow, Bostic suggested that the Fed will gain more confidence in its ability to keep inflation in check.
The broad-based easing of inflation, combined with signs of a weakening labor market, has led many market participants to expect a continued reduction in interest rates. While Fed officials have cautioned against overreacting to short-term data, the overall trend points to a more dovish policy stance in the months ahead.
Fed’s Path Forward
Looking ahead, the Federal Reserve faces a delicate balancing act as it navigates both cooling inflation and a softening labor market. The central bank’s primary goal remains to achieve price stability without undermining employment. Powell has repeatedly emphasized the importance of maintaining flexibility in monetary policy, ensuring that the Fed can respond quickly to evolving economic conditions.
As inflation approaches the Fed's 2% target, the pace and magnitude of future rate cuts will depend largely on labor market data and other economic indicators. The November policy meeting is expected to set the tone for the remainder of the year, with many traders betting on at least one more significant rate cut before 2024.
Ultimately, the Fed’s ability to strike the right balance between controlling inflation and supporting the labor market will determine the success of its current monetary policy. With inflation cooling and the job market softening, the central bank’s next moves will be crucial in shaping the trajectory of the U.S. economy in the coming months.
(Source:www.reuters.com)
