Fed Unlikely to Skip Rate Cuts in November, Says Citi

According to analysts at Citi, the Federal Reserve is not expected to forgo rate cuts during its meeting in November, even in light of recent labor market data that may have led some to rethink their predictions.

Citi noted that unfavorable labor market data had caused markets to anticipate a minimum 25 basis point rate cut at each meeting, with the possibility of more significant 50 basis point reductions. However, they also recognized that a stronger-than-expected 0.3% month-over-month increase in the core Consumer Price Index (CPI) introduced a more hawkish perspective, complicating the outlook for rate cuts.

The analysts expressed doubts regarding the sustainability of recent job growth, suggesting that the rise in government employment might not persist. They emphasized their skepticism about the continuation of strength observed in the recent jobs report for September.

Looking ahead, Citi expects the upcoming October jobs report to reflect a decline in performance, although market responses may attribute this to temporary disruptions caused by recent hurricanes, potentially clouding the true condition of the labor market until the November jobs report is available in early December.

Citi anticipates that, despite escalating inflationary pressures, Fed officials will likely aim to bring interest rates back to neutral levels. They predict at least a 25 basis point cut will be justified in November. The analysts stated, “While we might witness a stronger CPI reading this week, we believe inflation will remain subdued in the upcoming months. Weak global demand should help contain goods inflation, and a loosening labor market reduces the upside risk for non-shelter services.”

They further pointed out that shelter inflation has been “slow” to decline, as remarked by Chair Powell, but Fed officials are expected to anticipate a slowdown as long as rent and housing prices continue to rise at a slower pace.