As usual, the Federal Reserve will hold interest rate meetings on Tuesday and Wednesday and announce the decision on Thursday morning Beijing time. The November interest rate meeting coincides with the US general election, so the Fed's meeting is postponed by a day and will be held on November 6-7 for the policy meeting, with the rate decision being announced at 3:00 am Beijing time on November 8 (Friday).

Last week's series of economic data indicated that US inflation continued to slow, there were signs of cooling in the US labor market, and consumer spending remained robust. However,non-farm payroll dataIt has caused confusion in the market - September's job growth was exceptionally strong, but it was far below market expectations in October.

The CME Group's FedWatch tool shows that interest rate market traders expect a 98% probability of the Fed cutting rates by 25 basis points in November.

Nick Timiraos, also known as the 'new Fed wire service,' pointed out that with inflation continuing towards the 2% target, a 25 basis point rate cut this week is almost certain. However, the core issue currently facing Fed policymakers is: what level should interest rates be stable at? The answer to this question will directly affect the future policy direction of the Fed.

Steadily declining inflation, 'cooling' employment, and better-than-expected consumer spending

Federal Reserve officials often emphasize that their decisions are 'data-dependent,' updating rate outlooks as economic forecasts change. Last week's series of economic data indicated that US inflation continued to slow, there were signs of cooling in the US labor market, and consumer spending remained robust.

Consumer

Last Thursday (October 31), the US Department of Commerce released data showing that the actual annualized quarter-on-quarter GDP in the United States for the third quarter was 2.8%, lower than the expected 2.9%, and the previous value was 3%. It is worth mentioning that this is the first time the indicator has been lower than market expectations since the third quarter of 2023.

In terms of consumption, US consumer spending in the third quarter increased by 3.7% quarter-on-quarter, marking the largest increase since the second quarter of 2023. Both commodity and service consumption spending grew, with another major driving factor being federal government spending, while external trade dragged on economic growth.

Inflation

Also released last Thursday was the core PCE data, the inflation indicator most favored by the Federal Reserve, which saw the largest sequential increase in six months in September.

Excluding the volatile food and energy sectors, the so-called core Personal Consumption Expenditures Price Index (PCE) rose by 0.3% in September on a monthly basis, while the year-on-year increase continued to stick at 2.7%, with the previous value revised up from 2.2% to 2.3%. This further strengthens the Fed's rationale for slowing the pace of interest rate cuts.

Employment

Last Friday, the US Bureau of Labor Statistics released the Non-Farm Payroll Report, which showed, impacted by extreme weather and the Boeing strike in October.Non-farm employmentThe actual number is 0.012 million people, while the expected number is 0.113 million people.

At the same time, the non-farm data for September was revised down from 0.254 million to 0.223 million, and the non-farm data for August was revised down from 0.159 million to 0.078 million, totaling a reduction of 0.112 million over the two months. The US Bureau of Labor Statistics emphasized that in the October report, the Boeing strike may result in a loss of 0.044 million manufacturing jobs, while the impact of two hurricanes is deemed "difficult to quantify".

The fishy part lies not only in the non-farm job growth numbers, but also in the seemingly "unchanged" unemployment rate. Rounded to the nearest tenth, the US unemployment rate for October remains unchanged at 4.1%. However, on an unrounded basis, the actual increase in the US October unemployment rate was around 0.1 percentage point. These indicators are higher than a year ago when the unemployment rate was 3.8% with 6.4 million unemployed.

"New Fed News" - Nick Timiraos: 25 basis points rate cut in November is a foregone conclusion.

In his latest column article last weekend, Nick Timiraos predicted that Federal Reserve officials will cut rates by 25 basis points as a matter of course at Thursday's policy meeting. This would also align with the current mainstream market expectations - the CME Group's FedWatch tool shows that interest rate market traders predict a 98% probability of a 25-basis-point rate cut by the Federal Reserve in November.

Nick Timiraos' analysis suggests that while this week's policy meeting may not hold many surprises, Federal Reserve policymakers are currently facing a tough economic dilemma - why the US labor market continues to show signs of cooling while consumer spending remains robust. It is currently unclear how long these trends - stable spending and a slowing labor market - will last, as these data are revised monthly.

In an optimistic scenario, the growth in consumer spending will continue to help stabilize the labor market, leading the Federal Reserve to reduce the number of rate cuts; in a less optimistic scenario, further softening of income growth could drag down consumer spending in the coming months, making the economy more susceptible to a slowdown and potentially requiring the Federal Reserve to implement more rate cuts.

In such uncertain circumstances, Nick Timiraos cited Bosstick's statement as saying, the correct approach is to "be patient, accept volatility, devise a strategy, and figure out how things should evolve".

The Fed's easing path after November may not be as expected.

Although the CME's FedWatch tool shows a 98% probability of a 25 basis point rate cut at this week's November meeting, and an 81.7% probability of another 25 basis point cut at the December meeting, some major bank CEOs seem skeptical about this.

During an international forum hosted by CNBC's Sara Eisen, CEOs from major Wall Street investment banks including Goldman Sachs, The Carlyle Group, Morgan Stanley, Standard Chartered Bank, and State Street Bank did not raise their hands when asked if they believe the Fed will cut rates twice more this year.

Goldman Sachs CEO David Solomon stated that inflation will be more deeply embedded in the global economy than currently predicted by market participants, implying that inflation may be stickier than generally believed by the market.

CEO of Morgan Stanley, Ted Pick, went further by declaring last Tuesday that the days of loose money and zero interest rates are gone for good.

During a panel discussion hosted by Sara Eisen, Apollo Global CEO Marc Rowan questioned why the Federal Reserve chose to cut rates when the US economy, supported by so many fiscal stimulus measures, "looks healthy".

In late October, several Federal Reserve officials expressed views similar to a "cautious" or "slowed down" rate cut before the quiet period.

Dallas Fed President Lorie Logan said that officials should act cautiously in the face of high uncertainty in the economy, and she supports a "gradual" rate cut.

Kansas City Fed President Jeffrey Schmid stated that he hopes for a more normalized policy cycle, where the Fed can make moderate adjustments to maintain economic growth, price stability, and full employment. Slowing down the rate cut pace will help the Fed find a so-called neutral level - a policy that neither pressures the economy nor stimulates it.

Minneapolis Fed President Kashkari said that he supported the significant rate cut by the Fed in September, but reiterated support for future rate cuts at a slower pace over the coming quarters. "I currently anticipate some more moderate rate cuts over the next few quarters to bring rates to a neutral level, but this will depend on the data."

In the coming months, Fed officials will seek a balance in the evolving economic environment to ensure the effectiveness of monetary policy and stable economic development.

Editor/Rocky