After a phase of significant uncertainty concerning the direction central bank officials would take, markets have settled on a quarter percentage point decrease. If this occurs, it will lower the Fed’s primary interest rate to a range of 3.5%-3.75%.
Nevertheless, there are complexities involved.
The Federal Open Market Committee, responsible for setting rates, is divided between those who advocate for cuts to prevent further labor market deterioration and those who believe that easing has progressed too far and could worsen inflation.
This is the reason “hawkish cut” has become the trendy term for this session. In financial jargon, it implies a Fed that will reduce rates while conveying that anticipation for further reductions should be tempered.
“The most probable scenario is a type of hawkish cut where they lower rates, but the statement and press conference indicate they may pause on cuts for the time being,” stated Bill English, former director of monetary affairs at the Fed and currently a professor at Yale.
English predicts the message will communicate “that they’ve adjusted and are satisfied with their position, seeing no immediate necessity for further action as long as conditions develop as they anticipate.”
The final stance of the entire committee will be revealed in the statement post-meeting and in Chair Jerome Powell’s press conference. Analysts on Wall Street foresee a modification in the language of the statement reminiscent of the previous year regarding “the extent and timing of future adjustments,” with Goldman Sachs suggesting “the threshold for any additional cuts will be somewhat elevated.”
Beyond the rate decision and the statement, investors will be attentive to an update on the “dot plot” reflecting individual officials’ rate predictions; assessments of gross domestic product, unemployment, and inflation, as well as a potential update on the Fed’s asset acquisition strategies, with some anticipating the committee might transition from halting the runoff of maturing bond proceeds to reinitiating purchases.
Numerous variables
Regarding Powell, his demeanor “is also likely to convey that the threshold has increased in his press conference and will probably again emphasize the perspectives of participants who were against a cut,” noted Goldman economist David Mericle.
Concerning that dissent: The October meeting recorded two “no” votes on the concluding statement, one from each faction of the rate discussion. Mericle indicated this might recur, alongside several other “soft dissents” representing differing opinions on the “dot plot,” which anonymously reveals the rate outlook of each of the 19 meeting participants, including 12 voters.
While Mericle contended there is a “strong case” for a third cut, arguments exist for both sides.
“It’s a complicated meeting, so presumably there will be a few dissents,” English remarked. “Unifying the committee is often challenging. Different members hold very distinct views on the economy’s functioning and policy implications. This economic moment is particularly precarious.”
Despite a lack of official government statistics due to the resolved shutdown, employment growth appears to be stagnating, alongside intermittent indications that layoff rates are increasing. A Bureau of Labor Statistics report on Tuesday indicated that job openings remained steady in October, yet hiring decreased by 218,000 and layoffs rose by 73,000.
On the inflation front, the latest figures from the Fed’s favored index showed the annual rate at 2.8% in September, marginally below Wall Street expectations but still significantly exceeding the central bank’s 2% target.
Concerns about inflation
In spite of President Donald Trump’s assertions that inflation has faded, it has at most stabilized and at least is persisting above the Fed’s goal, partly due to tariffs enacted during his administration. While Fed officials have generally stated they anticipate the duties to offer a temporary uplift to prices, the disparity between the current rate and the central bank goal is sufficient to cause some economists and policymakers to reconsider.
“Inflation has not returned to 2%, so they will need to maintain a somewhat restrictive policy if they intend to apply downward pressure on inflation,” stated former Cleveland President Loretta Mester on Tuesday during her appearance on CNBC. “Currently, inflation is quite above the target, and it isn’t solely driven by tariffs.”
Still, Mester believes the FOMC will endorse one more cut on Wednesday.
Mirroring market observers, Mester regarded a November 21 speech by New York Fed President John Williams as the crucial indicator “quite clearly” signaling that another cut was impending. Prior to that, markets were leaning against a cut, especially after Powell explicitly stated during his October press conference that a December adjustment was not a “foregone conclusion. Far from it.”
“I believe they will proceed with that final cut,” Mester asserted. “I do hope they convey that they consider the economy has arrived at a point where policy is appropriately positioned and that they will temper the pace of cuts, as I am increasingly wary of the inflation risk, its persistence.”
Aside from rate considerations and the dot plot revision, the committee may indicate its next approach concerning the management of its balance sheet.
The committee in October indicated it would cease the “quantitative tightening” process, or the approach of letting maturing bond proceeds roll off. With ongoing pressures in the overnight funding markets, some market participants anticipate the Fed will announce a return to bond purchases, though at a rate that would not imply the “quantitative easing,” the inverse of QT.
