Fed 'succeeding' but cautious approach will be taken amid election uncertainty

Economic news out of the US continues to confirm that the Federal Reserve is succeeding in bringing about a soft landing, where inflation is brought down to target and a recession avoided.

PCE inflation in September undershot expectations, and the core subindex is clearly now back at the Fed's target of 2%. Meanwhile, data released is so far consistent with growth around 3% annualised, though admittedly it is very early in the quarter.

While the November presidential election remains a coin toss and casts a pall of uncertainty, we think that the Fed is likely to revert to a cautious pace of rate cutting in 2025.

This Friday's payrolls report should once again be consistent with a labour market that is generating modest job growth but remains near full employment. Another miss here, however, could cause markets to brace for the possibility of a second straight 50bp rate cut from the FOMC at its next meeting in early-November.