After the unexpected 50 basis point rate cut in September, market participants have turned their attention to the performance of the US economy to gauge the likelihood of further cuts. This focus aligns with the Federal Reserve’s shift toward monitoring the labor market, although inflation, especially excluding food and energy costs, is proving more stubborn than before.
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On September 30, Fed Chairman Jerome Powell said the U.S. economy is headed for a further decline in inflation, which could give the central bank room to lower its benchmark interest rate further and eventually reach a neutral level that supports economic growth. Powell also indicated that future rate cuts of 25 basis points at each meeting could become the standard approach.
Future Interest Rate Cuts
Federal Reserve officials expressed a variety of views about future interest rate cuts during the week, although most of them seem to be leaning toward a quarter-percentage-point reduction next month.
Despite this, St. Louis Fed President Alberto Musallam supported additional rate cuts depending on economic conditions, highlighting that future policy decisions will be data-driven.
New York Fed President John Williams, in an interview with the Financial Times, suggested gradual rate cuts over time after the significant half-percentage-point cut in September.
Fed Governor Adriana Kugler expressed strong support for the recent rate cuts and indicated she is prepared to support further reductions if the inflation trend goes down as expected.
Boston Fed President Susan Collins argued that despite inflation remaining high, progress is being made toward the central bank’s goal of reducing inflation to 2% by the end of 2025.
Inflation Risks
Dallas Fed President Laurie Logan said that despite supporting last month’s rate cut, she favors smaller rate cuts going forward, warning against premature rate cuts because of uncertainties in inflation risks and the economic outlook.
Fed Vice Chairman Philip Jefferson emphasized that the recent rate cuts are intended to maintain labor market strength during a decline in inflation.
Fed President Mary Daly
San Francisco Fed President Mary Daly supported the rate cut made in September and suggested that further rate cuts may be possible depending on the evolution of economic conditions.
Fed President Raphael Bostic
Atlanta Fed President Raphael Bostic expressed a more cautious outlook, suggesting the central bank could skip a rate cut at its next meeting due to recent volatility in inflation and employment data.
Following the release of a higher-than-expected U.S. Consumer Price Index (CPI) for the month of September, CME Group’s FedWatch tool now forecasts a roughly 82% chance of a 25 basis point rate cut at the Nov. 7 event, a significant increase from the roughly 50% chance predicted a month ago.
What’s in store next week?
The upcoming US economic calendar will focus on retail sales and weekly initial unemployment claims, as key data releases this week are expected to be influenced by the European Central Bank’s (ECB) interest rate decision on Thursday.
Additionally, market participants will closely monitor speeches from several Federal Reserve officials, with primary focus on the likely direction of the Fed’s interest rate policy.
