Fed Poised for Rate Cuts Amid Sluggish Job Growth and Inflation Concerns as Election Looms
Recent developments suggest that the Federal Reserve is poised for another adjustment in its monetary policy. According to the CME Group's FedWatch tool, there is an overwhelming probability of 99.7% that the Fed will lower interest rates by 25 basis points by November, with virtually no chance of maintaining current levels. As we approach December, the chances of maintaining rates are non-existent, and there's a significant likelihood of further cuts, with probabilities indicating a 19.5% chance for 25 basis points and an 80.3% for 50 basis points reduction in interest rates.
The October non-farm payroll employment figures, released recently, show an increase of just 12,000 jobs, sharply below the forecasted number of 105,000. This figure marks the slowest monthly employment growth since December 2020. The underwhelming job data comes as a critical input ahead of the Federal Reserve's upcoming meeting, bolstering the case for a rate cut. Inflation data, conversely, indicates a mixed picture with the September Core CPI witnessing a slight uptick to 3.3% from the previous 3.2%, suggesting underlying inflationary pressures persist.
Market reactions to this data have been pronounced. U.S. Treasury yields initially dipped after the employment figures were published but later rose, with the 10-year yield climbing over nine basis points. In the currency market, the dollar reacted with initial weakness before reclaiming losses, highlighting the complex interplay of economic indicators on investor sentiment. Equity markets, still reeling from recent sell-offs, demonstrated resilience with modest gains across major indices, though the overarching sentiment remains cautious.
The upcoming Federal Reserve meeting coincides closely with the U.S. election results, adding another layer of complexity to the economic outlook. The anticipated fiscal policies from the election outcomes are expected to impact inflationary trends. Market participants remain vigilant, cautiously optimistic but prepared for volatility in the policy landscape.