- ANALYSIS: Federal Open Market Committee (FOMC) members have adopted a reserved stance lately, even with indicators suggesting the job market might have faltered during the government closure. This cautiousness is tempering anticipation for a last interest rate reduction in 2025, as the Federal Reserve navigates persistent inflation and ambiguity alongside its commitment to achieving maximum employment. Investors have sustained some upward movement, buoyed by optimism that the U.S. Government shutdown will conclude shortly.
With the government shutdown persisting, a significant concern is growing for the economy. The job market, based on current data, indicates a slowdown, creating a puzzling situation for The Federal Open Market Committee (FOMC) members.
TL;DR
- Fed interest rate reduction likelihood in December is diminishing rapidly.
- Labor market slowdown and persistent inflation create a challenge for Jerome Powell.
- FOMC members express caution, balancing employment goals with price stability.
- Market optimism persists despite economic uncertainties and mixed signals.
Yesterday, data from payroll platform ADP reported U.S. Businesses had shed an average of 11,250 jobs a week for the four weeks ending October 25, “suggesting that the labor market struggled to produce jobs consistently during the second half of the month.” While economists have noted that private data like this is receiving unwarranted attention due to a lack of Bureau of Labor Statistics reporting, nevertheless, it “added to fears that the labor market hadn’t held up into the shutdown,” Deutsche Bank’s Jim Reid wrote to clients on Wednesday.
Investors haven't yet reacted with alarm to job losses, probably holding off until official government figures are released before re-evaluating their view of the U.S. Economy. Market optimism persists due to indications that the government shutdown in Washington is nearing its conclusion.
Yesterday, the Dow Jones finished trading up by more than 1%, while the S&P 500 saw little change. The VIX, a measure of market volatility, also kept dropping, decreasing by 2.5%, which indicates that experts anticipate a calm period for markets ahead. European markets also experienced slight increases during the initial trading session: Germany's DAX rose by just over 1%, France's CAC 40 gained 0.7%, and Spain's IBEX 35 climbed by a bit more than 1%.
The Shanghai Stock Exchange in Asia saw no change, whereas the Nikkei 225 and Hang Seng Index experienced slight increases.
In principle, less robust employment figures ought to support the Fed's decision to implement its widely expected reduction in the benchmark interest rate next month, thereby stimulating the economy. Nevertheless, CME's FedWatch tool indicates a decline in the probability that the FOMC will lower rates during its concluding session of the year. Previously, market participants assigned a 67% chance of a 25bps reduction next month, bringing the rate to a range between 3.5% and 3.75%. Currently, these probabilities have decreased to just above 63%.
The difference in outlook is even more pronounced when looking back to last month, at which point markets anticipated a 92% likelihood of a reduction. Conversely, the probability of rates remaining unchanged has consistently increased, reaching 36.6% currently.
Similarly, CME’s volume tracker for 30-day Fed funds futures has seen a decline in the last two weeks, possibly suggesting investors are adopting Powell’s ‘wait and see approach’ before committing to any decisions.
The market's hesitancy regarding an additional reduction stems partly from inflation's persistent 3% rate, which remains significantly above the Fed's 2% objective. This situation creates friction as the Federal Reserve strives to fulfill its dual mission of ensuring maximum employment and controlling price increases. Furthermore, given the ongoing market uncertainty influenced by trade tariffs, immigration regulations, and consumer sentiment, certain FOMC participants have adopted a more assertive stance on future monetary policy.
All-important consensus
Jerome Powell, whose responsibility is to foster the broadest possible agreement within the committee, will probably face a challenging task at the upcoming session.
Stephen Miran, a recent appointee of Trump, has thus far supported a more substantial reduction in the base rate of 0.50bps, mirroring the White House's stance. He emphasized this point again in a speech in New York on Friday, where he discussed stablecoins and stated that “even relatively conservative estimates of stablecoin growth imply an increase in the net supply of loanable funds in the economy that pushes down” the economy's neutral rate.
Previously, other individuals have expressed dissent, notably Governors Christopher Waller and Michelle Bowman, who opposed the decision to maintain rates earlier this summer. Some observers speculated if this disagreement was simply a performance to gain the president's notice as he sought a successor for Powell.
However, a more aggressive stance has been adopted by numerous members following the previous session. “It is very important that we tread with caution, because I believe there’s limited room for further reductions without monetary policy becoming overly accommodative,” St Louis Fed President Alberto Musalem told Bloomberg spoke on Monday.
Likewise Chicago Fed President Austan Goolsbee, often seen as a more dovish member of the committee, also struck a cautious tone in an interview with CNBC last week: “If there are problems developing on the inflation side, it’s going to be a fair amount bit of time before we see that, where if it starts to deteriorate on the job market side, we’re going to see that pretty much right away,” he explained. “So that makes me even more uneasy … with front-loading rate cuts and counting on the inflation that we have seen in the last three months to just be transitory and assume that they’re going to go away.”
In a Sunday interview, New York Fed's John Williams told the Financial Times stated that the Fed is confronting a “balancing act”: “These facts are fundamentally true — inflation is high, and it’s not showing signs of coming down right now. And at the same time, the economy is showing some resilience.”. He further commented that the labor market, though softening, isn't “shifting more dramatically”, adding: “No one’s really talking about recession.”.
Here’s a snapshot of the markets ahead of the opening bell in New York this morning:
- S&P 500 futures are up 0.55%.
- STOXX Europe 600 was up 0.65% in early trading.
- The U.K.’s FTSE 100 was up flat.
- Japan’s Nikkei 225 was up 0.43%.
- China’s CSI 300 was down 0.13%.
- India’s NIFTY 50 is up 0.7%.
- Bitcoin is slightly up, sitting at $105k.