The Fed and Wall Street both view the recent 50 basis point rate cut as just the beginning, but the two sides disagree on how quickly rates should fall.

Fed policymakers are insisting on continuing their slow and steady approach to lowering interest rates. Meanwhile, markets appear to be betting that worsening economic conditions will force the Fed to move faster. The data will prove who is right.

With the big rate cuts in September already completed and no recession in sight, the Fed does not need to rush. The terminal rate for rate cuts is the neutral rate, the level of interest rates that neither stimulates nor constrains economic growth. The median forecast in the so-called "dot plot" in September indicated a 100 basis point rate cut this year and another 100 basis point cut by the end of 2025, bringing the target range to 3.25% to 3.5%.

"While future actions will depend on the data we receive on inflation, employment, and economic activity, if conditions continue to evolve in their current direction, further rate cuts would be appropriate," Fed Governor Kugler said.

The longer-run median forecast for the federal funds rate in the September Summary of Economic Projections rose for the third consecutive quarter to near 3 percent, which is considered the committee’s collective estimate of the neutral rate, with most economists estimating it to be around 3 percent.

“There is a lot of debate about the level of the neutral rate in the U.S. and elsewhere,” Atlanta Fed President Raphael Bostic said. “However, the disagreement about what the true neutral level is is of little importance to me. Whatever the neutral rate is, I don’t know anyone who can reasonably think we are far from it.”

Overall, FOMC members expect a soft landing. The median forecast in the September Summary of Economic Projections shows real GDP growth of 2% per year through 2027 and a peak unemployment rate of just 4.4%.

Not all Fed officials think the fight against inflation is done. Fed Governor Bowman cast the only dissenting vote on September 18, preferring a quarter-point rate cut. She cited the risk of a rebound in inflation in the coming months.

“In my view, upside risks to inflation remain prominent, and global supply chains remain vulnerable to labor strikes and heightened geopolitical tensions, which could lead to inflationary effects in food, energy, and other commodity markets,” Bowman said Tuesday. “Expansionary fiscal spending could also pose inflationary risks, as could increased demand for affordable housing, especially given a prolonged period of limited supply.”

The next FOMC meeting will be held on November 6-7, a few days after the US election.

“While the headline of the data is always important, incoming labor market data will need to provide greater confidence that the Fed’s slowing trend is stabilizing,” Matthew Luzzetti, chief U.S. economist at Deutsche Bank, wrote on Wednesday.

Therefore, there are two dates to watch out for: October 4, when the September employment data will be released; and November 1, the date of the release of the October employment report, which is during the pre-FOMC meeting quiet period.

Luzzetti believes that if the unemployment rate exceeds the 4.4% median forecast for the end of the year in the FOMC's September dot plot and non-farm payroll growth remains at 100,000 per month or lower, then another 50 basis point rate cut in November will be on the table. Further downward revisions to initially reported hiring figures could increase the case for faster rate cuts.

That’s exactly what the market is betting on. Fed funds futures pricing on Wednesday showed about a 60% chance of another 50 basis point rate cut on Nov. 7, with the remainder supporting smaller cuts. Pricing also suggests more rate cuts in 2025 than the Fed’s base case assumes.

Unfortunately, Wall Street has no vote on the FOMC.

The article is forwarded from: Jinshi Data