Prior to this week's Federal Reserve monetary policy meeting, Nick Timiraos, a journalist from The Wall Street Journal known as the "new Federal Reserve News Agency," published the latest article. The full text is as follows.

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

Federal Reserve officials began a loose cycle with a significant 50 basis point rate cut at the previous meeting in September. They are trying to figure out where interest rates should stabilize after a series of significant rate hikes in the past three years due to high inflation.

After retiring in June following a 10-year tenure as the Cleveland Fed president, Mester said, "We are entering a new phase: over time, policies will become less stringent because the Fed is more confident about the direction of inflation, believing it will fall back to 2%."

This week's meeting should not be as suspenseful as the previous one. In the previous meeting, the market speculated on the size of the Fed's first rate cut in four years. Officials hope to avoid the spotlight as the interest rate decision meeting ends two days after the presidential election, and the Fed strives to maintain its independence.

The election on Tuesday also prompted the Fed to postpone the meeting by one day. The Fed usually concludes its two-day meetings on Wednesday in Eastern time, but this time it will be on Thursday.

Although this week's meeting may lack drama, officials may face tricky debates in the coming months. The first is deciding at what level interest rates should be. Secondly, while the election results will not affect this week's policy decisions, any policy changes by the next president and Congress to reshape the economic outlook could also alter the Fed's interest rate path.

Strong consumer, weak hiring.

Policymakers are facing a stubborn economic dilemma that may determine whether they feel pressure to slow down or speed up interest rate cuts in the coming months. The issue is that the labor market continues to show signs of cooling, but consumer spending has remained steady.

Economic data released last week put an exclamation mark on this puzzle. In the third quarter from July to September, the U.S. economy grew at a steady 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 that the Federal Reserve's interest rate stance is not as tight as some officials believe.

At the same time, demand for labor has steadily cooled. In the three months ending in October, the private sector added an average of only 0.067 million jobs per month, the lowest level since the outbreak of the epidemic in 2020. Although the unemployment rate remained stable at 4.1% last month, the proportion of workers permanently laid off rose to its highest level this year, which is one of several signs of reduced demand for workers.

It is currently unclear how long stable consumer spending and a slowing labor market can last.

In one scenario, stronger consumer spending will continue to help stabilize the labor market as it will maintain steady demand for workers. In this more optimistic scenario, the recent cooling of the labor market will reflect a normalization after the epidemic, allowing the Federal Reserve to reduce the magnitude of interest rate cuts.

A more ominous scenario is that further weak income growth may drag down consumer spending in the coming months, making the economy more vulnerable to slowdowns and possibly requiring the Federal Reserve to cut interest rates further.

Brighter income prospects

Federal Reserve officials are still navigating through a volatile data fog, with these data being revised every month. Some officials believe that the substantial rate cut in September was appropriate, as inflation has clearly decreased.

Ahead of that meeting, the unemployment rate for July had risen to 4.3%, with job growth slowing down. At that time, consumers seemed to be spending their savings to drive economic growth.

However, post-meeting revisions to government data showed that income growth was stronger than initially reported. As a result, the personal savings rate was revised upwards, meaning consumers were not as reluctant as imagined. Federal Reserve Chairman Powell stated in a meeting on September 30 that this revision "eliminated downside risks to the economy", "These are very large, healthy revisions."

Powell stated that robust data on economic activity may make officials somewhat more confident that the economy is not deteriorating. However, he noted that labor market data historically provide a "better real-time economic picture" than Gross Domestic Product (GDP) data. He then stated that robust economic activity data "won't deter us from looking very carefully at labor market data."

"Unreliable" Data

Before the September Fed meeting, the Labor Department reported that job growth for July and August exceeded expectations, with unusually strong job growth for September. This led to speculation that the Fed might need to consider slowing down the pace of future rate cuts.

However, the Fed subsequently received two shocking labor market reports. Employment data for August and September were revised downward. Additionally, job growth in October was far weaker than expected, partly due to strikes and hurricanes.

During the preparatory stage of this week's meeting, officials warned against completely reassessing their rate outlook based on any single monthly report.

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

The Federal Reserve may continue to cut interest rates by 25 basis points this week, in part because they are trying to formulate policies based on the forecast that inflation will continue to decline. With the decline 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 off.

Officials often emphasize that their decisions 'rely on data,' meaning they will update their rate outlook as economic forecasts change. San Francisco Fed President Daly said in an interview last month, 'Data-dependent' does not mean 'data-induced', employment data is constantly revised, fluctuating, this is a good lesson, telling us why we cannot rely on data points.

Bostic said that in such an environment, the correct approach is to 'be patient' and 'accept fluctuations before establishing a global strategy and understanding where things should go'.

Editor/Somer