As the world awaits the verdict of the Federal Reserve’s meeting this week, markets expect the central bank to cut interest rates by 25 basis points twice this year, on Thursday and during the December meeting.
The Federal Open Market Committee (FOMC) this week meets on November 6-7 following the U.S. presidential election and the release of key economic data that will likely impact the monetary policy’s trajectory.
Labor market cools
Policymakers’ confidence that the labor market is cooling but not crashing is likely intact despite new data showing U.S. employers added fewer workers in October than in any month since December 2020. The increase of 12,000 nonfarm payroll jobs last month was far below expectations. However, analysts attributed the dip to temporary job stops including the Boeing strike and the two large hurricanes that hit the shores of the Southeast.
Around 512,000 people reported they were not able to work due to bad weather, the largest rate for the month of October since the Bureau of Labor Statistics began tracking that figure in 1976.
The unemployment rate remained steady at 4.1 percent, low by historical standards. However, the report revealed that it may be getting harder to find a job once unemployed. The average length of unemployment rose in October to 22.9 weeks, from 20.6 weeks in September. The labor force also declined by 220,000 people.
The Federal Reserve will likely dismiss temporary impacts to the labor market when deciding to cut interest rates and focus on overall labor market softening when deciding to proceed with monetary normalization without the fears of rising inflation.
“I expect payroll gains to moderate from their current pace but continue at a solid rate. The unemployment rate may drift a bit higher but is likely to remain quite low in historical terms. While I believe the labor market is on a solid footing, I will continue to watch the full range of data for signs of weakness,” stated governor Christopher J. Waller at a recent conference in California.
Inflation nears 2 percent target
Recent personal consumption expenditures (PCE) data revealed that inflation reached 2.1 percent in September, up 0.2 percent month-on-month. That rate is slightly above the Fed’s 2 percent target. However, underlying price pressures are expected to keep the U.S. central bank cautious of inflationary pressures.
Currently, markets are pricing a 99.9 percent chance of a quarter-point rate cut this week to the 4.50-4.75 percent range, according to the CME FedWatch tool, and no chance of the Fed delivering another outsized cut as it did in September.
The Federal Reserve will begin its two-day policy meeting only a day after the U.S. presidential election on Tuesday. Although the results of the election will not directly impact the rate cut decision, analysts see election uncertainty as a temporary weight on the labor market in October. Following this week’s meeting the Federal Reserve will meet again on December 17-18, where it will likely cut interest rates by a quarter point too.
Read: Bank of Japan keeps interest rates unchanged at around 0.25 percent
Fed’s dual mandate
The FOMC focuses on reducing inflation while keeping employment at its maximum level. “Whatever happens in the near term, my baseline still calls for reducing the policy rate gradually over the next year. The median rate for FOMC participants at the end of 2025 is 3.4 percent, so most of my colleagues likewise expect to reduce policy over the next year,” added Waller.
At a conference on monetary policy in Germany, governor Adriana D. Kugler said that while the focus should remain on continuing to bring inflation to 2 percent, she supports shifting attention to the maximum employment side of the FOMC’s dual mandate as well.
“The labor market remains resilient, but I support a balanced approach to the FOMC’s dual mandate so we can continue making progress on inflation while avoiding an undesirable slowdown in employment growth and economic expansion. If progress on inflation continues as I expect, I will support additional cuts in the federal funds rate to move toward a more neutral policy stance over time,” she added.
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