November flashlight for the FOMC blackout – Period dialing back the pace of easing

Summary

The FOMC started its nascent easing cycle with a bang, opting to reduce the fed funds target range by 50 bps to 4.75%-5.00% at its last meeting on September 18. But further policy easing seems set to proceed at a slower pace. We look for the FOMC to reduce the fed funds rate by 25 bps at its upcoming meeting on November 7.

Since the Committee last met, U.S. economic activity has generally surprised to the upside and suggested ongoing resilience. Concerns about rapid softening in the labor market were allayed by the September jobs report showing a much stronger pace of hiring the past three months and the unemployment rate falling to a four-month low. Solid retail sales and upward revisions to income suggest consumer spending remains on a firm footing. Consumer price inflation also came in a bit stronger than expected in September.

The FOMC's September dot plot, the recent string of stronger-than-expected data and policymakers' comments give no reason to expect another 50 bps cut at the Committee's upcoming meeting. We expect the FOMC will continue to reduce its policy rate with a smaller 25 bps cut as the real fed funds rate remains elevated relative to the past expansion and Committee members' estimates of "neutral." Therefore, there seems to remain scope to "recalibrate" policy further to avoid the labor market cooling beyond the point of comfort without rekindling inflation.

Yet given the recent run of data along with some officials' prior reluctance to cut much further, if at all, this year, we would not be surprised to see another dissent at the November 7 meeting, and view the risks to our expectation for a 25 bps cut skewed toward the FOMC leaving rates unchanged rather than opting for another 50 bps cut.

Recent signs of funding pressures lead us to expect the FOMC will discuss the current pace of quantitative tightening (QT) at its November meeting. The secured overnight financing rate (SOFR) traded above the top end of the fed funds target range at the end of Q3, suggesting bank liquidity has become less ample. While we do not anticipate any changes to QT at this meeting, the recent stress will likely lead to an in-depth discussion about the timeline for the cessation of balance sheet runoff. We currently expect QT to cease at the end of Q1-2025.

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