November 30, 2024

     As widely expected the Federal Open Market Committee (FOMC) unanimously elected to lower the targeted fed funds rate by 25 basis points to 4.50%-4.75% at the November 6-7 meeting. The Fed kept the door open to further rate cuts as the Committee feels that rates are still restrictive and are still on a path toward a neutral stance, a level of rates that neither lifts nor slows economic activity. Because officials don’t have much conviction where the neutral rate is, they will likely be guided by how the economy performs in the months ahead. Thus, in his press conference following the meeting, Fed Chairman didn’t rule “out or in” a rate cut at the December meeting.

     The Federal Reserve is trying to steer between the risk of moving too quickly and undermining progress on inflation or moving too slowly and allowing the labor market to weaken too much. Chair Powell said the election wouldn’t have any effect on Fed’s near-term policy decisions, as it was too soon to say how next administration’s policies would reshape the economic outlook. That outlook is clouded by uncertainties related to fiscal and trade policies that the new administration may implement.

     The U.S. economy has remained resilient and the labor market appears to have stabilized for the moment, but progress on the inflation front appears to have stalled and remains stubbornly above the Fed’s 2% inflation target. Headline Consumer Price Index (CPI) ticked up in October bringing the 12 month rate to 2.6%, up from September’s 2.4% year-over-year rate. Core CPI, which excludes volatile food and energy prices, rose 0.36% in October, as it also did in September and August. While the year-over-year rate held steady at 3.3%, the annualized 3 month rate of change accelerated to 3.6%.

     The labor market’s outlook is also a mixed picture. Non-farm employment rose a meager 12K in October, largely impacted by Hurricanes Helene and Milton, while the number of Americans applying for unemployment benefits has trended down to seven month lows. However, other data continue to point to a labor market that is decelerating. A jump in continuing claims to a three-year high may signal a cooling in the job market with more to come in light of layoff notices by Boeing, automotive giant Stellantis and the closing of fast food establishments. Job opportunities and openings have dwindled as companies are taking a cautious approach in hiring. Certain “return to office” mandates have also suggested the willingness, or even a desire, to cut employee head counts in some organizations.

     Elevated uncertainty, the ongoing resilience of consumer spending, the primary engine of economy, and recent upward surprises to the inflation readings may result in a slower and shallower path of rate cuts by the Federal Reserve. The path is still tilted downward as Fed officials still believe current policy is restrictive and they want to move down to a neutral rate, one that neither stimulates nor restrains economic activity. Because officials don’t have much confidence over where that neutral rate sits, however, they will likely be guided by how the economy performs in coming months. The odds are currently stacked in favor of the Federal Open Market Committee electing to continue on its path toward neutral at the upcoming December 17-18 meeting with a 25 basis point rate cut, but with another month’s worth of inflation and labor market data prior to the meeting, it could easily become a toss-up.