Cut or pause? 2 critical reports will determine what Fed does in November.

Mon, Oct 28, 2024, 2:00 AM 5 min read

'It won't be easy'

What is a sure bet is that all Fed policymakers are going to be paying close attention to the reports due out this week.

First up is a new reading Thursday from the Fed’s preferred inflation gauge — the Personal Consumption Expenditures (PCE) index.

It is supposed to show that so-called core inflation, which excludes volatile food and energy prices, cooled a tenth of a percent to 2.6% during the month of September from 2.7% in August. The Fed’s goal is to get this measure all the way down to 2% over time.

A separate reading on inflation, known as the Consumer Price Index, was warmer than expected during the month of September. That offered new ammunition for those on the Fed arguing for a gradual pace of rate cuts following the jumbo reduction in September.

The second critical report this week will be a reading on the labor market due out Friday.

That report may not offer officials a clear assessment because it could be buffeted by two major hurricanes that temporarily caused people in the regions affected by the natural disasters to be out of work, as well as an ongoing labor strike at jet maker Boeing (BA).

Economists expect 125,000 jobs will be added for the month of October, which would mark a drop from the stronger-than-expected 254,000 payrolls added in September. The unemployment rate is expected to hold steady at 4.1%.

"Unfortunately, it won’t be easy to interpret the October jobs report," said Fed governor Christopher Waller on Oct. 14.

"This report will most likely show a significant but temporary loss of jobs from the two recent hurricanes and the strike at Boeing," added Waller, who expects the storms could reduce employment growth by more than 100,000.

Anecdotal evidence collected across the Fed’s 12 regional bank districts in October showed a gently cooling but stable job market, according to the latest release of the Fed’s Beige Book.

Layoffs were limited and employment increased slightly, with more than half of the Fed districts reporting slight or modest growth, but that hiring was focused on replacing jobs rather than creating new ones. The pace of wage increases also slowed.

'Gradual' and 'modest'

Waller is among a group of Fed officials who have used speeches in recent weeks to argue for a "gradual" approach to cutting rates as they absorb some new evidence that inflation and the job market remain warm.

Minneapolis Fed president Neel Kashkari has said he is looking at "modest" interest rate reductions in the "coming quarters," while Kansas City Fed president Jeff Schmid noted his preference “would be to avoid outsized moves."

And Dallas Fed president Lorie Logan has said that rates will come down "gradually," citing an increased risk that the job market could worsen and a danger that inflation could still heat up again.

The median estimate of all Fed policymakers in September was for two more 25 basis point rate cuts for the remaining two meetings of the year.

Atlanta Fed president Raphael Bostic is one who has said he is entertaining the idea of holding rates steady at the next meeting.

He told the Wall Street Journal he was "totally comfortable" with holding steady at the Fed's Nov. 6-7 meeting and that he had already penciled in an estimate of just one more rate cut this year.

Despite hints of a pause from hawkish members of the Fed, EY chief economist Gregory Daco cited the guidance of Fed Chair Jay Powell as a reason why he believes the Fed will stick with two more 25 basis point cuts at the remaining two policy meetings this year.

"Fed Chair Powell has stressed that policy gradualism will prevail through year end," Daco said in a note.

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