The US Federal Reserve is expected to announce an interest rate cut on Wednesday, with a nearly 100% probability of a 25 basis point reduction. The federal funds rate is currently targeted between 4%-4.25%, and the cut would be the second consecutive quarter percentage point reduction. However, the Fed’s future path of reductions, challenges posed by a lack of economic data, and the timetable for ending the reduction in its asset portfolio of Treasurys and mortgage-backed securities are presenting substantial challenges to policymaking.
There is a growing divergence of opinion among Fed policymakers on the future of monetary policy, with some advocating for a bigger cut and others expressing reluctance to go further. Newly appointed Governor Stephen Miran is likely to dissent in favor of a bigger cut, while regional Presidents Beth Hammack, Lorie Logan, and Jeffrey Schmid have expressed reluctance to go much further on cuts. Chair Jerome Powell is expected to try to straddle the difference and provide guidance on the prevailing sentiment.
The labor market is a major concern for the Fed, with worries over jobs potentially keeping the Fed cutting well into 2026. The annual inflation rate remains above the central bank’s 2% target, but the lack of economic data due to the government shutdown is posing a challenge to policymaking. The Fed is also facing a data blackout, with the only official data release during the shutdown being the consumer price index report, which showed an annual inflation rate of 3% in September.
The Fed’s dual mandate to maximize employment and keep prices stable is being hindered by the lack of data, making it hard to make policy decisions. The market is expecting the Fed to announce an end to its quantitative tightening program, which has entailed allowing proceeds from maturing securities to roll off rather than being reinvested. The Fed’s overnight funding facility is nearly drained, and officials are likely to signal that the program is in its final stages.
Overall, the Fed’s policy meeting is expected to be challenging, with a range of issues to be addressed, including the future path of reductions, the labor market, inflation, and the quantitative tightening program. The market is eagerly awaiting the Fed’s announcement and guidance on the prevailing sentiment, and Chair Powell’s speech is expected to provide valuable insights into the Fed’s thinking.