Will the Fed Pause Rate Cuts in November?
In his August speech at Jackson Hole, Federal Reserve Chairman Jerome Powell shifted focus from inflation to the labor market, hinting at last month’s 50-basis-point rate cut. However, Fed officials later clarified that they expect to move forward with smaller cuts of 25 basis points.
Recently, the U.S. economy has surprised many with unexpected strength. From the impressive employment report earlier this month to last week's higher-than-expected Consumer Price Index (CPI), the momentum is undeniable. If the Fed is data-driven, they might conclude that the economy is stronger now than it was in early October.
Last Thursday, retail sales data came in, showing a 0.4% month-over-month increase, surpassing the expected 0.3%. Even more impressive was a 0.5% rise in "core" retail sales, significantly exceeding the meager 0.1% forecast. Additionally, jobless claims fell sharply to 241,000, down from 260,000. The Philadelphia Fed’s manufacturing index also beat expectations, coming in at 10.3 compared to the anticipated 4.2.
Rate Cut Expectations
Given these robust figures, traders now estimate only a 10% chance that the Fed will cut rates in November. This seems reasonable.
Powell and his colleagues prefer a gradual and predictable approach to monetary policy, minimizing disruptions to the economy. A drastic shift from maintaining steady rates to a 50-basis-point cut, and then a pause, could introduce more uncertainty—especially with the presidential election on the horizon.
Conditions for No Rate Cut
To keep rates unchanged, the Fed needs all four key economic reports to significantly exceed expectations as we approach the next meeting on November 6. These reports include:
Jobless claims on October 24 and 31
Core PCE price index report on October 31
Non-farm payroll report on November 1
The Bottom Line
Assuming each report has a 50% chance of beating expectations, and all must exceed them, the probabilities suggest that the likelihood of the Fed holding rates steady in November is around 6%, closely aligning with current market expectations.
In summary, while the chances of the Fed pausing rate cuts in November are slim, they aren’t impossible. If every key economic report leading up to the meeting indicates stronger-than-expected performance, the Fed might just consider keeping rates where they are.
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