Several second Federal Reserve swords have emerged after the bank’s mega-cut last week. To everyone’s surprise, none of them have closed the door on another 50 basis point cut in one fell swoop for the next meeting (November 7). The market has not had time to quickly dismiss expectations of another giant cut. At present, the odds are 50/50 between a single and a double relegation.
Jerome Powell made an effort last week to halt the wild rate cuts. But their colleagues at the Chicago, Atlanta and Minneapolis Fed put the ball back on the field. In classic financial jargon, they did not rule out the possibility and discussed the neutral interest rate, an interest of a theoretical, almost esoteric typewhich is located at the exact point where the economy can grow without imbalances. The problem is that no one knows how to calculate it..
“Over the next 12 months, we have a long way to go to get the interest rate back to something like neutral to try to keep conditions where they are,” Chicago Fed President Austan Goolsbee said.
His focus now is on ensuring the labor market remains robust, because “the damage to jobs is happening faster than we can repair it” by cutting rates, he warned. “If we want a soft landing, it’s not realistic to wait until problems arise. We have to stay ahead of them.” And he concluded: “The interest rate is several hundred basis points higher than the neutral rate.“.
Neither Goolsbee nor any of his colleagues favor a repeat of the central bank’s half-point cut on Sept. 18. And they stuck to Powell’s script that they were data-dependent.
The Fed estimates the long-term neutral rate to be 2.9%, well below the current range of 4.75% to 5%. Each quarter, the Federal Reserve releases its official interest rate roadmap and eventually reveals each member of the Federal Open Market Committee (FOMC)’s outlook for the neutral rate. As always, andThe result is very scattered, but it serves to give an idea of the end of the cycles..
In a series of statements by Federal Reserve officials, Atlanta Fed President Raphael Bostic was more cautious than Goolsbee about how quickly the Fed should cut rates, but acknowledged that the Fed will likely have to cut rates to reach neutral.I don’t know anyone who plausibly disputes the idea that we are a reasonable distance above.” he stressed at another conference.
It will depend on the data.
Bostic cautioned against assuming a repeat of last week’s decision, but added that “any further evidence of significant weakening in the labor market over the next month will certainly change my view on the degree of aggressiveness of the policy adjustment.”
Federal Reserve Bank of Minneapolis President Neel Kashkari acknowledged that “after 50 basis points, we’re still in a net tight position, so I felt comfortable taking a larger first step,” but stressed that “as we move forward, I expect that, overall, we’ll probably take more modest actions unless the data changes materially.”
The statements moved the market. The 10-year U.S. bond rose from 3.8% to its lowest level of the day, to more than 3.73%. And expectations for the rate cut on November 7 also soared. The FedWatch tool, which tracks financial swaps that investors use to hedge their positions on interest rate movements, They began to rule out a 50% probability that the cut would be 50 basis points.. On Friday, the odds were 20%.
Next Thursday, it will be the turn of public interventions by Jerome Powell and Michelle Bowman, the only FOMC member to oppose the giant cut.
