Fed rate cut outlook: Another ‘cheerful’ cut in November

Almost all of his peers expected the Fed to cut rates by a quarter of a point, with some noting that a surprise rise in core consumer inflation last month would prevent central bankers from enacting a sizeable cut. Others on Wall Street warned that a bigger move would signal the economy is in worse shape and needs more help.

But Feroli said in a note on Thursday that the Fed should have cut rates in July and that a 50 basis point cut this month would help policymakers catch up.

He also pointed out that Fed Chairman Jerome Powell has managed to put a nasty spin on the forever rate cut by promoting the strength of the economy and the desire to keep it strong.

“In other contexts, a bigger move may convey more concern about growth, but Powell repeatedly stressed that this was basically a happy cut, as lower inflation allows the Fed to act to keep the labor market strong,” wrote Feroli. “Furthermore, if the policy is set optimally, it should bring the economy back to a good place over time.”

Fed Governor Christopher Waller echoed that sentiment on Friday, telling CNBC he voted for the half-point cut because inflation is cooling faster than he anticipated.

Central bankers meet again on November 6-7 and Feroli expects another 50-point cut, although this is contingent on the next two jobs reports showing more weakness.

However, stronger job gains would seal the deal for the Fed’s “goldilocks scenario” of quarter-point cuts at the November and December meetings, he added.

Investors are almost evenly tipped between 25 points and 50 points for the November meeting, according to CME’s FedWatch tracker. And the so-called dot chart of Fed officials’ forecasts suggests they anticipate cuts of two-quarters of a point by the end of the year.

For his part, Powell cautioned that the Fed’s big move this month does not indicate the pace of further rate changes in the easing cycle.

“Ultimately, what I found most important in what Powell said was also among the least surprising things he said: future decisions will depend on the data,” Feroli observed. “If labor markets continue to tighten, we could see more big cuts in the future. If job growth and the unemployment rate stabilize, the path is clear for a gradual return to neutral.”

Meanwhile, economists at Bank of America also see a half-point cut in November. After that, they see a series of quarter-point cuts until the federal funds rate hits 2.75%-3% sometime in 2025, down from 4.75%-5% currently.

At Citi, economists have had a dim view of the economy for several months, warning that a recession is likely. They also expect a half-point cut at the Fed’s next meeting, with the outlook tilted toward more cuts going forward.

“Powell struggled to explain why the labor market would stabilize around current levels and not continue to deteriorate when rates remain at levels the Fed considers restrictive for at least another year,” he wrote Read in a note on Friday. “And given that he described the 50 basis point cut this week as a ‘commitment’ not to get behind the curve, we think the bar for a continued weakening trend in employment to prompt further large cuts of rates is low.”