Fed Rate Cut Expectations: Another ‘Happy’ Cut in November

Most of his peers expected the Fed to cut rates by a quarter-point, with some suggesting that a surprise surge in core consumer inflation last month would prevent central banks from cutting rates broadly. Others on Wall Street warned that any bigger move would signal that the economy is in worse shape and needs additional help.

But Feroli said in a note on Thursday that the Fed should have cut rates in July and that a 50 basis point cut this month would help policymakers catch up.

He also noted that Federal Reserve Chairman Jerome Powell was able to put a hawkish spin on the loose interest rate cuts by touting the strength of the economy and the desire to keep it strong.

In other contexts, a larger move might convey greater concern about growth, but Powell repeatedly stressed that this was essentially a cheery cut because falling inflation allows the Fed to act to maintain a strong labor market. Moreover, if policy is optimally designed, it should return the economy to a favorable place over time.

Federal Reserve Governor Christopher Waller expressed similar sentiments on Friday, Tell CNBC He said he voted for a half-point rate cut because inflation was cooling more quickly than he expected.

Central bankers are due to meet again on November 6-7, and Feroli expects another 50 basis point cut, though that is conditional on the next two jobs reports showing further weakness.

He added that stronger job gains would seal the deal on the Fed’s “ideal scenario” of cutting interest rates by a quarter percentage point at its November and December meetings.

Investors were roughly evenly split between 25 and 50 points for the November meeting, according to CME FedWatch TrackerFed officials are forecasting a quarter-point rate cut by the end of the year.

For his part, Powell warned that the big move taken by the Federal Reserve this month is not an indication of the pace of subsequent interest rate moves in the easing cycle.

“Ultimately, what we found most important in what Powell said was also among the least surprising things he said: Future decisions will be data-driven,” Feroli noted. “If labor markets continue to slow, we may see more significant cuts ahead. If job growth and the unemployment rate stabilize, the path to a gradual return to neutral will be clear.”

Meanwhile, Bank of America economists are forecasting a half-percentage-point cut in November. After that, they expect a series of quarter-percentage-point cuts until the federal funds rate reaches 2.75%-3% sometime in 2025, down from 4.75%-5% today.

At Citigroup, economists have been looking at the economy in a gloomy light for months, warning of the possibility of a recession. They also expect a half-percentage-point rate cut at the next Fed meeting, with expectations tilted toward more aggressive cuts in the future.

“Powell struggled to explain why the labor market has stabilized around current levels and not continued to deteriorate further when rates remain at levels the Fed considers constrained for at least another year,” Citigroup wrote in a note on Friday. “Given that he described this week’s 50 basis point cut as a ‘commitment’ not to fall behind the curve, we believe the threshold for a continued weak employment trend to prompt further large rate cuts is low.”