The Federal Reserve on Thursday is expected to announce its next policy move on interest rates in the wake of the election and after an influx of economic data.
Policymakers on the Federal Open Market Committee (FOMC) are expected to announce a 25 basis point cut, lowering the benchmark federal funds rate to a range of 4.5% to 4.75%, down from the prior range of 4.75% to 5%.
The expected cut follows a larger than usual cut of 50 basis points in September, which was the first rate cut in four years after inflation surged to a 40-year-high following pandemic-related supply chain disruptions and an influx of federal spending on relief measures and other initiatives.
Fed Chair Jerome Powell is scheduled to hold a press conference following the Fed’s announcement where he will take questions on the central bank’s plans for rate cuts or pauses at meetings to come.
FED’S FAVORED INFLATION GAUGE SHOWED PRICE GROWTH CONTINUED TO SLOW IN SEPTEMBER
The Fed’s policy meeting comes as inflation has continued to show signs of cooling, though prices remain stubbornly high. It also comes after a weaker than expected jobs report raised concerns about the health of the labor market.
Last week, the Commerce Department released data showing that the Fed’s favored inflation gauge – the personal consumption expenditures (PCE) index – was up 2.1% from a year ago in September. That was down slightly from 2.3% in August as the pace of price growth continued to slow. The Federal Reserve is focusing on the PCE headline figure as it looks to bring inflation back to its 2% target. Core PCE, which excludes volatile food and energy prices and is viewed as a better indicator of inflation, was up 2.7% and little change from a month ago.
The Labor Department’s jobs report for October found that the U.S. economy added just 12,000 jobs, well below the 113,000 gain that was predicted by LSEG economists. That marked the lowest monthly jobs tally since December 2020 – though a strike by 33,000 unionized machinists at Boeing and economic dislocation caused by Hurricanes Helene and Milton contributed to the smaller-than-expected jobs gain.
US ECONOMY ADDED 12K JOBS IN OCTOBER, WELL BELOW ECONOMISTS’ EXPECTATIONS
The market’s expectations of a 25 basis point interest rate cut on Thursday were unchanged following President-elect Trump’s victory over Vice President Harris, though they have shifted slightly for the Fed’s meetings in the coming months.
The probability of the Fed moving forward with another 25 basis point cut to a range of 4.25% to 4.5% in December decreased slightly to 67.2% from 77.3% on Wednesday following the election, while the chance of the Fed holding rates steady rose to 31.2% from 22%, according to CME FedWatch.
EL-ERIAN: INTEREST RATES, INFLATION MOVING IN RIGHT DIRECTION, BUT LOWER PRICES ‘NOT GOING TO HAPPEN’
“We think the most important things for the December FOMC meeting will be the two CPIs and the one jobs report between now and then,” wrote Michael Feroli, chief U.S. economist at J.P. Morgan, in an analyst note. “At the margin the election outcomes may have lowered the odds of a cut then by a wee amount, as the appreciation in risk assets could be a factor in the discussion.”
“After December we now see the Fed easing at a quarterly pace, with the next ease in March and continuing until the funds rate reaches 3.5%,” Feroli wrote.
Uncertainty surrounding the Fed’s rate cut plans in 2025 is reflected in CME FedWatch’s probabilities for the January meeting. The market sees a 53% probability of rates being at 4.25% to 4.5%, which would imply a 25 basis point cut following a cut of the same size this month. That’s up from a 47% probability as of Election Day.
Following the election, the probability of a more aggressive January cut to a range of 4% to 4.25% declined from 41% to 26.9%, while the probability of the Fed holding rates at 4.5% to 4.75% rose from 10.6% to 19.2% after the election.
The Fed is scheduled to hold its next policy meeting on Dec. 17-18, while its January meeting is scheduled for Jan. 28-29.
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