Fed officials reiterate ‘modest’ path forward for interest rate cuts

As we noted yesterday, we have a relatively quiet week for economic data ahead. Let’s take the breather as an opportunity to review where we currently stand.

The data we’ve gotten since the Fed’s 50-basis point cut last month shows, generally, economic strength. September’s jobs report showed employers added 254,000 jobs, blowing expectations (140,000) out of the water. Unemployment is steady at 4.2% and annual inflation is hovering around 2.2% — not far off from central bankers’ 2% target.

Things are looking good. And, it’s worth noting, things were looking up when the Fed opted for its massive cut in September after a summer of Goldilocks data.

Enter the sentiment shift: Did the Fed go too far in September?

Some analysts argue yes.

“Today’s data further confirms our assessment that the Fed was too dovish when it cut the federal funds rate by 50bps on Sept. 18,” strategists at Yardeni Research wrote in a note after last week’s consumer spending figures dropped.

Noelle Acheson, author of “Crypto is Macro Now,” said she’s questioning whether a November cut makes sense at all. The markets may agree.

Fed funds futures are now predicting a 10% chance of no rate cut in November, according to CME Group data. It may not seem like much, but markets were calling for a 3% chance just last week.

The overwhelming majority is still anticipating a 25bps cut. Tomorrow’s Beige Book release should give us some more insight.

Fed officials are now on a bit of a press tour, with several speakers this week reiterating the party line: Rates need to come down slowly.

Kansas Fed President Jeffrey Schmid said Monday that the Fed should be making “modest” adjustments. Dallas President Lorie Logan said she supports a “strategy of gradually lowering the policy rate.” And Minneapolis President Neel Kashkari, a vocal supporter of the September cut, said Monday he also envisions a cautious approach moving forward.

I take “modest” to mean 25bps cuts. As we know from the dots last month, those would be in line with committee expectations.