Traders Expect the Fed to Implement Another 50bps Rate Cut in November

Traders have slightly increased their expectations for the Federal Reserve to implement a 50-basis-point rate cut in November, following a government report that indicated a modest rise in inflation in August. This development suggests that the central bank may be focusing more on the labor market.

Current interest rate futures indicate a 54% probability of a half-point cut in November, while the chances of a smaller quarter-point reduction stand at 46%. Regardless of the specific outcome, traders are forecasting a total decline of 75 basis points by the end of the year, bringing the current policy rate of 4.75%-5.00% down.

Analysts at Citi share the perspective that the Fed will indeed cut rates by another 50 basis points in November, emphasizing that the final decision will largely depend on upcoming data, especially the next monthly jobs report.

Although jobless claims are currently low, focus is shifting towards the employment components of PMI data. Fed Chair Jerome Powell characterized the initial 50-basis-point reduction as an indication of the Fed’s willingness to take decisive action should the labor market show further weakness.

According to Citi strategists, “If the unemployment rate stabilizes around its current level, the Fed may choose to reduce the pace of rate cuts to 25 basis points per meeting.” Nonetheless, they believe that forthcoming economic data might encourage the Fed to maintain a more aggressive approach in cutting rates.

Despite Fed officials being reassured by stable jobless claims and a low rate of layoffs, Citi points out a deceleration in hiring and softer private payroll growth, which is now averaging around 90,000 new jobs per month, as indicators of possible future rises in unemployment.

With two more jobs reports expected before the Federal Open Market Committee meeting in November, Fed officials will have additional data to analyze the ongoing softening trend in the labor market.

The personal consumption expenditures (PCE) price index, which the Fed uses as its preferred measure of inflation, increased by 0.1% in August. This brings the annual inflation rate to 2.2%, down from 2.5% in July, marking the lowest rate since February 2021. Economists had anticipated a 0.1% monthly rise and a 2.3% annual increase.

When excluding food and energy, core PCE also saw a 0.1% rise for the month, leading to a 2.7% year-over-year increase, which aligned with forecasts. Fed officials typically place greater emphasis on core PCE as a more reliable indicator of long-term inflation trends. The annual core inflation rate narrowly increased from July’s 2.6%.