Fed has a rate cut plus a bunch of other things on its plate this week

The easy part for the Fed on Wednesday will be to announce a rate cut when it concludes its two-day policy meeting. The hardest part will be attending to other details that present major challenges to policy making these days.

Markets are pricing in a nearly 100% probability that the Federal Open Market Committee will approve a second consecutive quarter-point cut, or 25 basis points, in the federal funds rate. The overnight lending rate is currently targeted at between 4% and 4.25%.

Moreover, policymakers are likely to discuss, among other things, the future path of the cuts, the challenges posed by the lack of economic data and the timeline for ending the cut in its asset portfolio of Treasuries and mortgage-backed securities.

All of these deliberations will highlight a growing divergence of opinion about what the future holds for monetary policy.

“They’re at a moment in the policy cycle where there’s real disagreement between people who think we’ll probably cut rates but I’m not ready to cut rates again yet, and people who think that while there are risks, it’s time to do more now,” said Bill English, a Yale University professor and former director of monetary affairs at the Fed. “There is opposition between people who want to cut now, and people who want to wait and see more.”

Based on recent statements and sentiment on Wall Street, newly appointed Governor Stephen Meiran will likely oppose a deeper cut, as he did at the September FOMC meeting.

Meanwhile, regional chairs Beth Hammack of Cleveland, Lori Logan of Dallas and Jeffrey Schmid of St. Louis have expressed reluctance to move forward on the cuts, though it is not clear whether they will vote against the cut this week. Only Miran, who wanted a reduction of half a point, actually objected to what it was The committee voted 11-1 last month To cut by a quarter point.

And from the left to try to overcome the difference will be the president Jerome Powellwhich he delivered in his last speech An implicit reference to the October cut When he expressed his concern about the state of the labor market.

Investors will look to the central bank chief, who will leave his post in May 2026, for guidance on prevailing sentiment.

“I expect him to try to compromise, not necessarily change his position, in December,” English said, referring to the next policy meeting after this one. “I don’t think he wants to have to cut interest rates in December. But on the other hand, he seems to be concerned about the labor market and about the outlook for real activity, so he doesn’t want to appear hawkish.”

Markets are also currently pricing in an almost certain cut in December, according to CME Group FedWatch So it will take a lot of time to dissuade Wall Street from expecting more Fed easing.

Concerns about jobs

One of the main reasons why officials are in the mood for cuts is… Concern about the job market. Even in the absence of data, there are clear signs that inflation is slowing even if layoffs do not accelerate, judging by state unemployment claims that are still continuing despite the federal shutdown.

In fact, concerns about jobs could see the Fed cut interest rates through 2026, said Luke Tilley, chief economist at Wilmington Trust.

“We expect 25 [basis points Wednesday] “And then again in December, and then again in January, March and April. And then that would bring them down to what we think is the neutral range to 2.75% to 3%,” Tilley said.

Fed officials noted in September, through “plot point” Individual members expect that they will not reach a rate that neither drives nor constrains growth — the so-called “neutral” rate — until 2027, and even then it will be a quarter of a percentage point higher than Tilly sees.

However, he believes the Fed will have no choice but to respond to labor market weakness, especially as it challenges the surprisingly strong economic growth seen in the second half of this year.

Concerns about jobs have captured more of the Fed’s attention even as inflation remains well above the central bank’s 2% target. The Bureau of Labor Statistics reported last week, in the only official data release during the shutdown period, that the annual inflation rate as measured by Consumer price index It was stuck at 3% in September.

The challenge of lack of data

Beyond the CPI report, central bankers face the additional challenge of the data blackout that has accompanied the crisis Government shutdown.

“It’s hard to make policy to achieve two goals… when you don’t get data on at least one of them,” Tilly said, referring to the Fed’s dual mandate to maximize employment and maintain price stability, and the absence of a September nonfarm payrolls report due to the shutdown.

“I expect this will be communicated as more uncertainty about the path forward, and that they should be prepared to change and hold interest rates, if necessary, or to cut them more quickly when they finally get the data,” Tilly said.

Finally, markets will be looking for more definitive answers about when the Fed will stop reducing its $6.6 trillion balance sheet, most of it in Treasuries and mortgage-backed securities. This process, called quantitative tightening, entailed allowing the proceeds from outstanding securities to flow out rather than being reinvested as usual.

in Speech recentlyPowell noted that the time is approaching when the Fed wants to stop QT. While financial conditions remain largely strong, there have been some small signs recently that short-term markets are tightening. With the Fed’s overnight financing facilities nearly exhausted, officials will likely signal this week that the QT program is in its final stages.

Market comments were divided on whether the Fed would announce the actual end of the program, or indicate a future date when it would stop.

“There are signs that they are approaching the bottom, so to speak, in terms of getting abundant reserves and actually getting some tightness and liquidity. That’s why I expect an announcement, if not action,” Tilly said.