Fed: What is the Threshold for Another 50?

Analysts at Deutsche Bank are noting an increasing likelihood of another 50 basis point (bp) rate cut by the Federal Reserve, despite earlier expectations that the reduction in September would be a one-time event.

The bank has been closely analyzing the Fed’s recent communications to gauge the conditions that might lead to another significant rate decrease. Although the September Federal Open Market Committee (FOMC) meeting presented the 50bp cut as an individual occurrence, Fed officials have recently expressed more openness to the possibility of further substantial cuts.

Deutsche Bank pointed out that Governor Waller indicated his support for more aggressive action if the labor market deteriorates further or if inflation continues to fall unexpectedly. They also noted that Fed Chair Jerome Powell had initially framed the large cut as not a hurried step toward achieving a neutral policy rate.

Despite this, only one out of the 19 officials projected another 50bp reduction for the year, according to the dot plot released by the Fed. However, recent statements from more hawkish officials, such as Raphael Bostic of Atlanta and Neel Kashkari of Minneapolis, suggest a growing readiness to consider another significant cut if warranted by economic data.

The key indicators for a potential second 50bp cut are linked to the labor market. Deutsche Bank emphasizes that if the unemployment rate exceeds the median forecast of 4.4% and payroll growth remains weak, the Fed may be more inclined to make another rate cut.

The analysts further state that the threshold for a second 50bp reduction in November may not be particularly high, especially in light of declining consumer confidence and labor market sentiment. With the October employment report set to be released during the Fed’s communication blackout period, the bank suggests that any signs of further labor market weakening could prompt another decisive rate reduction.