The upbeat September jobs report and sharp upward revisions to GDP and GDI suggest the Federal Reserve’s 50 basis point rate cut in September was “unwarranted,” according to Bank of America strategists.
BofA said conversations with clients quickly shifted from debating whether the Fed would cut 25 or 50 basis points in November to whether a rate cut was needed at all. Some are even speculating whether the Fed might forego a November rate cut to offset the larger-than-expected September cut.
However, the bank’s strategists believe that even if the Fed later finds that the September cut was overdone, it is unlikely to deter it from cutting 25 basis points in November, especially in light of strong jobs data.
“Governor Waller has expressed this in his recent comments. As long as the Fed is convinced that broad-based disinflation is on track, it can continue cutting rates at neutral levels,” the strategists said in a note Tuesday.
While the labor market has overshadowed inflation concerns of late, attention is turning back to the consumer price index (CPI) ahead of Thursday’s data release. BofA expects core CPI to be 0.3% month-on-month, above consensus, but believes core PCE will be a milder 0.2%.
It notes that this should be weak enough for the Fed to proceed with a 25 basis point cut in November, as the annual rate “would decline due to favorable base effects” and Chair Powell has gained some flexibility by “deemphasizing the stickiness of housing inflation,” strategists said.
In recent weeks, economist and former PIMCO CEO Mohamed El-Erian’s term “data point dependence” has come to capture the market’s heightened sensitivity to macroeconomic data releases.
BofA strategists agree, saying that while it’s natural for the Fed to be data-dependent, not all data surprises are equally significant.
Still, the Fed’s focus on not falling behind has “caused markets to react to data surprises as if they were just news and nothing special. And that’s not likely to change anytime soon,” strategists noted.
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Reference;
Karaahmetovic, V. (2024) What would it take for the Fed to pause in November? By Investing.com, Investing.com. Investing.com. Available at: https://www.investing.com/news/economy/what-would-it-take-for-the-fed-to-pause-in-november-3654695 (Accessed: 9 October 2024).
