Federal Reserve Policy Meeting Opens Amid Uncertainty
The Federal Reserve opened its policy meeting on Tuesday amid uncertainty about the path ahead. Although a rate cut is anticipated, Jerome Powell signaled last August in Jackson Hole that the move is coming, yet the size of the drop remains unclear as investors await Wednesday’s decision. After eleven hikes since March 2022 to curb inflation, the Fed has kept the target range at 5.25% to 5.50% since July of last year, the highest level since 2001. Economists have urged caution, while CME Group’s FedWatch shows roughly 63% of traders expecting a 50 basis point cut and about 37% anticipating 25 basis points, Reuters notes.
On Wednesday at 2:00 p.m. Eastern, the central bank will issue its statement and Powell will address the public in a briefing. In recent remarks the chairman spoke with clarity about policy, indicating that the time has come to adjust monetary settings, Reuters reports.
The Fed faces significant challenges. The macro backdrop supports a gradual easing cycle, but the timing may not be perfect for a decisive reversal of the trend. The recent course of the labor market has generated some nerves. In practical terms, there is limited room for further deterioration before recession risks become a larger concern, according to analysts.
Although the labor market has cooled, job creation persists in the United States. Inflation has declined toward the lows seen in 2021, though the core measure has not moved in tandem. The consumer price index rose by four tenths in August to 2.5% year over year. The labor market has posted several months of softer hiring and signs of cooling, with the unemployment rate at 4.2% and 7.1 million people out of work, 800,000 more than a year earlier. The firm’s chief economist, Erik Weisman, leans toward a 0.25 percentage point cut this month, though a 0.50 point move is possible if the data turn more favorable, according to industry observers. Allianz Global Investors’ Michael Krautzberger, CIO Global Fixed Income, also sees a 0.25 point cut as likely but does not rule out a larger move given the labor market trajectory, Reuters notes.
While the European Central Bank and other institutions have moved more decisively, the Federal Reserve has remained cautious, arguing that the data have not yet provided a clear signal for a sustained turn toward looser policy, according to Reuters coverage.
The elections add pressure on the Fed
The upcoming November elections add an additional layer of pressure for the Fed. With the economy among the variables that sway voters, a sizable rate cut could be perceived as compromising the Fed’s impartial stance and might benefit the Democrat ticket, as the election nears. Richard Roberts, professor of economics at Monmouth University and former Fed official, believes the Fed will likely reduce rates by 0.25 percentage points because the economy remains solid and inflation has been stubborn. He warns that cutting too soon could reignite inflation and make the Fed appear political during a pivotal election cycle, a concern highlighted as voters head to the polls on November 5, Reuters reports.
This meeting arrives as U.S. stock indices hover near record highs while the dollar has softened against the yen and the euro. Investors expect the first rate cut on Wednesday and anticipate further reductions on November 7 and December 18. In total, markets price a sequence of cuts totaling about 1 to 1.25 percentage points across the three scheduled meetings for the year. In addition to policy rates, after each quarterly gathering, Fed participants publish their projections and discuss the expected path for unemployment, economic growth, inflation, and the appropriate level of interest rates, Reuters notes.