Although the path seemed set and all that remained was to wait, it appears that the Federal Reserve is approaching a decisive moment. As labor market data spoke of a cooling and inflation seemed increasingly linked, doves flew over the Fed. Optimism for an aggressive cycle of rate cuts has built and this sense of speed has reached the monetary institution itself, with an aggressive 50 base cut. points in one fell swoop in September. However, the minutes showed that the move was fraught with controversy within the central bank and the latest data has some “hawks” calling for the Fed to change its pace. Reviving an option that seemed completely dead a few hours ago: that the Fed does not touch its rates at all before December.
The President of the Federal Reserve Bank of Atlanta, Raphael Bostic, expressed this Thursday evening in an interview on The Wall Street Journal. “I feel completely comfortable if a rate cut is not implemented,” the senior official explained. According to him, recent labor market and CPI data “add volatility” to the central bank’s judgment. “This instability indicates to me that maybe we should take a break in November. “I’m definitely open to that.”
This comment related to the general climate after the recent CPI and employment data has made the option of not having a single move at the November meeting gaining momentum. Although 80% of the Overnight Indexed Swap market believes there will be a 25 point decline, a week ago the possibility was 98%. The option that there will be no reduction has been installed at 18% compared to 2.6% a few days ago.
This Thursday, data on inflation were published in the United States where they increased by 2.4% against 2.3% for analysts. Beyond this figure, the underlying CPI deteriorated, which rose by a tenth to 3.3%. Although slight, this unexpected rebound surprised many analysts, who thought that disinflation would be permanent. Furthermore, these data are accompanied by very good labor market figures for the month of September, with 254,000 non-agricultural jobs created, or 100,000 more than expected. Both fronts, in favor of greater calm, are raising the option of a “truce”, while analysts and members of the institution itself wonder if, perhaps, Powell has gone too far by reducing 50 basis points at once.
Regarding the pause, although it is still a minority option, it reflects that something has radically changed in the market and analysts already see that it is an option that can quickly be on the table. “Now the question is whether the Fed will cut by 25 points or decide to make no move,” comment Gavekal Research. The experts conclude by saying that “even if the rise in the CPI is not large enough to prevent a further decline of 25 basis points, there are events in the coming days this may tip the scales in favor of a break.
What could a break bring?
Although at the moment it seems like a distant option, experts see four factors in the coming days that could make this expanding option the Fed’s inevitable destiny. the October payroll report. Although Hurricane Milton will cause some anomalies that will affect the reliability of this data as a reliable indicator of the labor market, the reality is that if the numbers emphasize its resilience, the Fed hawks would be strengthened in their view of do not touch interest rates. .
From TS Lombard, they point out that the great consensus of the Fed, divided on the sensitivity of the reductions, was that “less employment This is now a greater risk than a resurgence of inflation. ” In this sense, this belief that the labor market could collapse is what made “almost everyone understand that it made sense to recalibrate interest rates.”
However, even then, a group of them stressed that “rolling back policy moderation too soon or too much could risk stagnation or reversal of progress on inflation.” Without the job alert, your voice will gain strength. From Gavekal they agree and emphasize that “if the October figureafter adjusting for hurricane distortions, is very strong or very weak, it could affect the Fed’s decision secondarily.
On the other hand, oil enters the scene, with a rebound with the geopolitical tension in the Middle East, faced with a possible attack by Israel on the Iranian oil structure, the European reference barrel has risen to 81 dollars. If the trend continues, the “hawks” would be strengthened, given that energy prices have been one of the main keys explaining disinflation. “If oil prices rise significantly due to an escalation of war in the Middle East or in response to economic stimulus measures in China, the increase could boost inflation expectations and increase the likelihood of a pause in rates,” they comment from Gavekal.
On the other hand, there is another factor advocated by Gavekal experts which completely prevails.: earnings season and its impact on the stock market. “A sharp fall in stock prices could dampen demand and increase disinflationary pressures, which would strengthen the case for cuts. On the contrary, a continued upward trend would help support demand”, thus providing arguments to stop the fall in the “price of silver”. .
A divided Fed after… going too far?
Either way, analysts say the most logical thing is that the path of budget cuts continues to be the norm. BCA Research comments that despite the latest mixed data, “the disinflationary trend remains intact“However, the bank’s path since September leaves the Fed divided after the ‘jumbo’ cut. In the same Fed minutes, it was noted that several Fed members had expressed disagreement with the decision.
In this sense, some MPs believe that the right thing to do is to correct what they consider to be a misstep with an overly aggressive move. A divergence which already makes certain members of the institution assume that a period of very close debates is coming to take the head of the central bank. Austan Goolsbee, president of the Chicago Fed, spoke openly about the issue in an interview this Thursday with CNBC, in which he acknowledged that probably “At the next meetings we will reach a very close agreementGoolsbee is among the members who have come out clearly in favor of greater flexibility, arguing that “price pressures are a thing of the past.”
In any case, the discord comes from the jumbo cut. Eric Wallerstein, chief market strategist at Yardeni Research, said Friday that’s why they think the Fed might not cut rates. “I think the Fed will remain firm for the rest of the year” he said, adding that the central bank’s change of course in September, with a significant reduction, “was certainly premature.”
“The big break came from stress, some saw that they had made a mistake by not moving in July”
According to TS Lombard, the decision to make a significant reduction in September came from “stress”. For the signature “Ultimately, they cut back because they saw the job as a greater risk than inflation but why did a majority vote 50 points? The answer is that many thought they should have cut back on spending in July, and when they didn’t, they wanted to make up for lost time due to the stress of a weakened job market. the preemptive reduction will continue to be imposed, unless there is an undeniable deterioration in the CPI or a worrying deterioration in the data (such as a collapse in the payroll).”
ING is betting on an absolute division but this will yield to cuts, but with a more cautious approach. “The Battle Between U.S. Jobs Figures and Inflation Data Over Federal Reserve Policy Outlook remains unresolved“. Therefore, “monetary policymakers will need to act more cautiously, but our base case remains a rate cut of 25 basis points in November and December.”
RBC analysts estimate, for their part, that even if they expect a truce, they estimate that it will be after December, when the floor will be reached in the “price of silver” of 4.25%. At that time, the monetary institution will be able to analyze well whether it needs to take a break and, given that it expects resistance from the labor market, it considers this as the main scenario. Of course, whatever happens, the Fed faces key days where the data will determine whether it just “wipes out” the era of giant cuts or whether it goes even further and ends the cuts.
