Rate Cuts Still on the Table — Evening Brief – 10.17.24
Concerns of a pending U.S. recession have diminished recently; yet additional interest rate cuts remain on the table. The interplay of a strong economy and expectations for monetary easing appears wrong to some observers; nonetheless, Federal Reserve Governor Christopher Waller emphasized on Monday that the central bank still anticipates further easing is likely.
Waller observed that the recent robust economic data indicates that interest rate cuts will be more gradual. However, those seeking confirmation that rate cuts were no longer an option were disappointed by his address at Stanford University this week.
“The data is signaling that the economy may not be slowing as much as desired,” Waller said. “While we do not want to overreact to this data or look through it, I view the totality of the data as saying monetary policy should proceed with more caution on the pace of rate cuts than was needed at the September meeting.” In sum, “Whatever happens in the near term, my baseline still calls for reducing the policy rate gradually over the next year.”
The markets are siding with Waller. As of Thursday, the market is pricing in a 90% probability of a quarter-point rate cut at the Federal Open Market Committee (FOMC) meeting on November 7 and an 84% chance of another quarter-point cut at the December 18 meeting, according to the CME FedWatch Tool.
The policy-sensitive U.S. 2-year Treasury yield, meanwhile, is trading at 3.94%, far below the current Federal funds target range of 4.75% to 5.00%, and that’s after the 50-basis point rise seen over the past four weeks, indicating that the market anticipates a series of imminent rate cuts.
FOMC members generally concur that further reducing interest rates is appropriate. “The Fed’s dot plot, a visual representation of policymakers’ interest rate projections, suggests a target for the funds rate of about 3% once inflation stabilizes at 2% and the labor market is fully employed,” Richard Clarida, former vice-chair of the Fed and global economic advisor at Pimco, wrote this week.
According to the projection for the upcoming September CPI report, the Cleveland Fed’s inflation forecasting model indicates that the central bank’s 2% target has been met. Meanwhile, although unemployment, at 4.1% in September, has risen, it remains close to its lowest level in decades. Using Clarida’s criteria as a guide, the prospects of lower rates are fairly high.
The risks to the Fed’s inflation and employment objectives are now balanced, according to San Francisco Fed President Mary Daly, who emphasized that policymakers must continue efforts to sustain labor market strength while striving to reduce inflation to the 2% objective.
“We must stay vigilant and be intentional, continually assessing the economy and balancing both of our mandated objectives: fully delivering on 2% inflation while ensuring that the labor market remains in line with full employment,” Daly said in prepared remarks at the NYU Stern School of Business this week.
Even with last month’s aggressive half-point interest rate cut, monetary policy “remains restrictive, exerting additional downward pressure on inflation to ensure it reaches 2%,” she said, noting the labor market “is no longer a major source of inflation pressures.”