What Factors Could Lead the Fed to Pause in November?

Investing.com – The positive jobs report for September, along with significant upward revisions to GDP and GDI, suggests that the Federal Reserve’s decision to implement a 50 basis point (bp) rate cut in September may have been excessive, according to analysts at Bank of America.

The discussions among Bank of America’s clients have shifted from whether the Fed would reduce rates by 25bp or 50bp in November to questioning if any rate cut is necessary at all. There is even speculation that the Fed might choose to forgo a November cut to compensate for the larger-than-expected reduction in September.

Nevertheless, the bank’s analysts believe that even if the Fed concludes that the September cut was too large, it is unlikely to be deterred from proceeding with a 25bp reduction in November, especially in light of strong labor data.

"Governor Waller stated as much in his latest remarks. As long as the Fed is confident that broad-based disinflation is progressing, it can continue to adjust rates back to neutral," the strategists noted in a recent communication.

While the robust labor market has recently taken precedence over inflation worries, attention is turning once more to the Consumer Price Index (CPI) ahead of the upcoming data release. Bank of America anticipates a core CPI increase of 0.3% month-over-month, which is above market expectations. However, they project that the core Personal Consumption Expenditures (PCE) will be relatively tame at 0.2%.

They assert that this data should be soft enough for the Fed to feel comfortable with a 25bp rate cut in November, as the year-over-year rate is expected to decline due to favorable base effects. Additionally, Chair Powell has gained some leeway by downplaying the persistent nature of housing inflation, according to the analysts.

In recent weeks, economist and former PIMCO CEO Mohamed El-Erian’s concept of "data point dependence" has captured the market’s heightened responsiveness to macroeconomic data announcements.

Bank of America strategists concur, emphasizing that while it is natural for the Fed to respond to data, not all surprises carry the same significance.

Still, the Fed’s commitment to avoid falling behind the curve has led markets to react to data surprises as though each one is significant. This pattern is likely to persist for the foreseeable future, the strategists remarked.