After the Fed aggressively cut interest rates by 50 basis points in September, many traders were expecting another 50 basis point cut in the upcoming November 7th meeting. However, as economic data since the September 18th rate cut has been remarkably strong, most traders then thought that a 25 basis point cut would be the most likely course of action. Some however, are starting to wonder if a rate cut will happen at all.
The chart above is the rate cut probabilities from the Chicago Mercantile Exchange’s FedWatch tool. As can be seen, traders are currently (as of 10/20/2024) pricing in a 99.4% chance that the Fed cuts rates by a smaller 25 basis points, and they are pricing in only a 0.6% chance of a 50 basis point cut. The reason for this is that recent economic data releases, specifically consumer spending and labor market data, have been indicating that the economy is actually rather strong and in a period of expansion. Federal Reserve board members have been rather clear since the last rate cut that, due to strong recent economic data, they are planning on a 25 basis point cut in November. September’s CPI inflation data also came in hot, showing that although inflation is slowly declining towards the Fed’s goal of 2%, it will not be a smooth path. Headline CPI was at a year over year rate of 2.4% in September, close to the 2% goal. However, Core CPI increased 0.1% to 3.3% in September, showing that inflation may be far stickier than anticipated. Sonu Varghese of the Carson Group wrote, “CPI Inflation data was slightly on the hotter side, with commodity prices outside of energy rising more than expected…The big picture is inflation continues to pull lower, albeit with some bumps along the way.” With inflation not quite where the Fed wants it, they are extremely unlikely to aggressively cut rates in November. This should add conviction to the probability of a smaller, 25 basis point cut.
If economic data continues to come in extremely hot from now until November 7th, there is a possibility that the Fed doesn’t cut rates at all. Paul Ashworth of Capital Economics wrote, "Looking at the labour market strength evident in September’s employment report, the real debate at the Fed should be about whether to loosen monetary policy at all..Any hopes of a [50 basis point] cut are long gone." This may be problematic, if the Fed were to go from raising rates and then holding them steady for a few years, to aggressively cutting with a September’s 50 basis point cut, to holding rates steady, it could indicate a lot of uncertainty and hesitancy about where our economy is at. Also, because just about every investor is currently pricing in at least a 25 basis point cut, to not do so could be disastrous. The Fed’s goal is to not surprise any investors, they don’t want their decisions to add large amounts of volatility to the markets. If the Fed really were to hold rates steady, it would be because every single economic report from now until November 7th absolutely smokes economist expectations. The biggest economic reports to look at between now and then would be the October 24 and 31 initial unemployment readings, Core PCE on October 31, and the October NFP data on November 1.
At the moment, the most likely possibility is the Fed going with a 25 basis point cut in November, it makes the most sense given current economic conditions. It will be important to continue to watch economic data releases prior to November 7th, specifically the releases I mentioned above, as these will be the data that will ultimately help the Fed make their final decision.
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