Although the Fed and Wall Street have reached a consensus on the path of rate cuts, namely that the recent 50 basis point rate cut is only a prelude, they have different views on the pace of rate cuts. The Fed's top leaders tend to adopt a gradual rate cut strategy to ensure a stable transition; while the market expects the Fed to accelerate its actions due to the deepening economic haze. Data will be the final judge of this clash of views.
Given that the sharp rate cut in September has been implemented and the economy has not yet entered a recession, the Fed believes that there is no need to rush for success. Its goal is to reduce interest rates to a neutral level, that is, a balance point that neither stimulates nor inhibits the economy. According to the "dot plot" forecast in September, the rate may be cut by another 50 basis points this year, and the cumulative rate cut may reach 200 basis points by the end of 2025, bringing the target range closer to 3.25% to 3.5%.
Fed Governor Kugler emphasized that future actions will be closely based on inflation, employment and economic activity data, and if the current trend continues, further rate cuts will be reasonable. At the same time, the long-term federal funds rate forecast has risen for three consecutive quarters, approaching the neutral interest rate level of 3%, and most economists also hold this view.
Atlanta Fed President Bostic pointed out that although the specific value of the neutral interest rate is controversial, the key is that the Fed is still far from this level, no matter what its exact value is. FOMC members generally hope for a soft landing of the economy, predicting that real GDP will grow by 2% annually by 2027, and the peak unemployment rate will be controlled within 4.4%.
However, not all Fed officials are optimistic about inflation control. Board member Bowman is one of the dissenters. She advocates a more cautious rate cut and is worried that inflation may rebound in the coming months, especially due to factors such as global supply chain fluctuations, geopolitical tensions and fiscal spending expansion.
With the next FOMC meeting scheduled for a few days after the election, the market focus will be on the upcoming employment data. If the unemployment rate is higher than expected or employment growth continues to be sluggish, the market generally expects another 50 basis point rate cut in November, and the pace of future rate cuts may be faster than the official forecast of the Federal Reserve.
