Will the Fed's interest rate cuts continue? Critical developments.

Uncertainty in Fed's Interest Rate Policy

The shutdown of the government in the U.S. significantly reduces the predictability of the Federal Reserve (Fed)’s monetary policies due to disruptions in the flow of public institution data. The inflation data released in September, falling below market expectations, strengthens the anticipation of an interest rate cut at the Fed meeting scheduled for next week.

Ongoing Challenges in the Labor Market

Experts believe that the persistent challenges in the U.S. labor market will allow the Fed to continue with interest rate cuts into 2024. Philip Marey, Senior U.S. Strategist at Rabobank, indicated that the decline in inflation data supports a 25 basis point interest rate cut at the Fed's October meeting. Marey noted the weakness in the labor market and suggested that it is possible for the Fed to announce the end of the Federal Open Market Committee (FOMC) balance sheet reduction process.

Market Expectations and Fed’s Strategy

Marey pointed out that due to the limited nature of national-level data, Fed Chairman Jerome Powell may not provide much insight regarding the December meeting. Considering the weakness evident in the labor market and the downward risks posed by the government shutdown, there is a belief that another 25 basis point interest rate cut could occur in 2024. However, Marey stated, "If inflation or employment data unexpectedly jumps up, the Fed may skip interest rate cuts at the December meeting."

Economic Outlooks and Fed’s Confidence

ING Chief International Economist James Knightley also emphasized that a 25 basis point interest rate cut is expected at the October meeting. Knightley recalled that the Fed reduced interest rates in September, viewing it as a "risk management" move. However, he pointed out that inflation remains a significant issue.

The lack of optimistic signs from business surveys regarding the economy supports Knightley’s predictions of the Fed lowering interest rates at the October meeting and a subsequent 25 basis point cut in December. Notably, the updated FOMC forecasts from September indicate expectations of two consecutive interest rate cuts by 2026 to support growth. Still, the market approaches the Fed’s forecasts with skepticism, believing that the rapidly cooling labor market requires more urgent measures.