Why the Fed may hesitate to cut rates
The FOMC cut its target rate in October for the second time this year, lowering the fed funds rate by 25 basis points to 3.75-4%. The Fed also said it would stop running off its $6.6 trillion balance sheet at the start of December. The principal payments of mortgage backed securities will only be reinvested into Treasury bills.
While most official economic data releases have been suspended by the government shutdown, Powell noted that the available official and alternative indicators suggest that inflation (net of tariff effects) is now close to the 2% target and that the labor market has continued to cool gradually.
The Fed chair said more emphatically than in September that policy is not on a preset course, noting that another rate cut in December is “far from” a foregone conclusion. He also acknowledged that there are “strongly different views” on the FOMC about how to proceed in December. In particular, he added, “there’s a growing chorus now of feeling like maybe this is where we should at least wait a cycle,” meaning that the policy committee should not cut at its next meeting.
And the Fed chair also pointed out that some participants might see the lack of official data as a reason not to cut in December. While careful not to commit to this view himself and to note that “it’ll probably be argued both ways,” he said that some participants might see the absence of data and the greater uncertainty as a reason to slow down and leave policy unchanged.
Is the Fed expected to cut rates?
“We still think that the arguments for a December cut remain intact,” Mericle writes.
The FOMC’s summary of economic projections for September implied that most participants saw a December cut as the baseline, according to Goldman Sachs Research. The Fed’s past packages of risk management cuts (proactive rate cuts to guard against potential risks to the economy) also suggest that a third and final cut is the default.
Labor market data are “unlikely to send a convincingly reassuring message” by the time of the FOMC meeting in December, Mericle adds. Goldman Sachs Research sees signs that the weakness in the US job market “is genuine.” In addition, deferred resignations of government employees instigated by the Department of Government Efficiency are likely to generate a negative payrolls report in October and “weigh a bit on November,” Mericle writes.
And finally, Powell said in the October press conference that he sees the Fed’s monetary policy as modestly restrictive, and that this is one of the reasons that the labor market is still gradually cooling. “Because the FOMC does not want further cooling, this is likely to be a strong argument for another cut,” Mericle writes.
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