Ahead of this week's Federal Reserve meeting, Nick Timiraos, a reporter for the Wall Street Journal known as the 'new Federal Reserve whisperer,' published the latest article. Below is the full content.

As inflation continues to move toward the 2% target, the Federal Reserve is expected to cut interest rates by 25 basis points at its meeting later this week.

Federal Reserve officials began a loosening cycle with a significant rate cut of 50 basis points at their last meeting in September. They are trying to figure out where interest rates should stabilize after three years of high inflation led to a series of large rate hikes.

Meester, who retired in June after serving as Cleveland Fed President for 10 years, said, 'We are entering a new phase: over time, policy will become less restrictive, as the Federal Reserve is more confident about the direction of inflation and believes it will return to 2%.'

This week's meeting should not be as suspenseful as the last one, where the market speculated about the scale of the Federal Reserve's first rate cut in four years. Officials hope to avoid the spotlight because this meeting concludes two days after the presidential election, as the Federal Reserve works to maintain its independence.

Tuesday's elections also prompted the Federal Reserve to postpone the meeting by a day. The Federal Reserve typically concludes its two-day meeting on Wednesday Eastern Time, but this time it will end on Thursday.

Although this week's meeting may lack drama, officials may face tricky debates in the coming months. First is determining where interest rates should be set. Second, while the election results will not affect this week's policy decision, any policy changes by the next president and Congress that reshape the economic outlook could also alter the Federal Reserve's interest rate path.

Strong consumption, weak hiring

Policymakers are facing a stubborn economic puzzle that could determine whether they feel pressure to slow down or accelerate rate cuts in the coming months. The question is: the labor market continues to show signs of cooling, but consumer spending has remained solid.

Recent economic data has put an exclamation point on this puzzle. From July to September in the third quarter, the U.S. economy grew at a solid annualized rate of 2.8%, thanks to consumer spending, which has exceeded expectations over the past year. Some economists point out that this resilience suggests the Federal Reserve's interest rate stance is not as tight as some officials believe.

Meanwhile, demand for labor is steadily cooling. In the three months ending in October, the private sector added an average of only 67,000 jobs per month, the lowest level since the pandemic began in 2020. While the unemployment rate stabilized at 4.1% last month, the proportion of workers permanently laid off rose to the highest level of the year, which is one of several signs indicating reduced demand for workers.

It remains unclear how long stable consumption and a slowing labor market can persist.

In one scenario, stronger consumer spending would continue to help stabilize the labor market, as it would maintain stable demand for workers. In this more optimistic scenario, the recent cooling in the labor market would reflect a normalization post-pandemic, allowing the Federal Reserve to reduce the extent of rate cuts.

A more ominous scenario is that further weakness in income growth could weigh on consumer spending in the coming months, making the economy more susceptible to a slowdown and potentially requiring the Federal Reserve to cut rates further.

Brighter income prospects

Federal Reserve officials are also navigating through a fog of unstable data, which is revised every month. Several officials believe that a significant rate cut in September is appropriate as inflation has clearly decreased.

Before that meeting, the unemployment rate had risen to 4.3% in July, and employment growth had slowed. At that time, consumers seemed to be drawing on their savings to drive economic growth.

However, revisions to government data after the meeting showed that income growth was stronger than initially reported. As a result, the personal savings rate was revised upward, suggesting that consumers are not as cash-strapped as previously thought. Federal Reserve Chairman Powell stated at a meeting on September 30 that this revision 'eliminated the downside risk to the economy,' adding that 'these are very large and healthy revisions.'

Powell indicated that robust data on economic activity might somewhat reassure officials that the economy has not deteriorated. However, he noted that labor market data has historically provided 'a better real-time picture of the economy' than GDP data. He stated at the time that robust economic activity data 'will not prevent us from examining labor market data very carefully.'

"Unreliable" data

Before the September Federal Reserve meeting, the Labor Department reported that employment growth in July and August exceeded expectations, and September's employment growth was unusually strong. This led to speculation that the Federal Reserve may need to consider slowing the pace of future rate cuts.

But then the Federal Reserve received two shocking labor market reports. Employment data for August and September was revised down. Additionally, employment growth in October was far weaker than expected, partly due to strikes and hurricanes.

In preparation for this week's meeting, officials warned against completely rethinking their interest rate outlook based on any single monthly report.

Atlanta Fed President Bostic said in an interview last month, 'I've been saying we should expect data to be 'unreliable' ('janky') and may rebound. We may occasionally receive 'unreliable' reports, the question is, 'Do they indicate a new trend?'

The Federal Reserve may continue to cut rates by 25 basis points this week, partly because they are trying to formulate policy based on the expectation that inflation will continue to decline. With the drop in energy and commodity prices, inflation has slowed over the past year. Many officials no longer see the labor market as a source of inflation, as employment growth is cooling.

Officials often emphasize that their decisions 'depend on data,' meaning they will update their interest rate outlook as economic forecasts change. San Francisco Fed President Daly said in an interview last month, 'Data dependence does not mean data stress; employment data is constantly revised and fluctuates, which is a good lesson telling us why we cannot rely on data points.'

Bostic said that in such an environment, the right approach is to 'stay patient' and 'accept volatility before formulating a strategy and figuring out where things should go.'

Article forwarded from: Jin Ten Data