Federal Reserve Rate Cut Likely as Economic Data Shows Weakness

Summary:

Recent economic indicators suggest the Federal Reserve may cut interest rates at its upcoming meeting. Weak labor market data, slowing core PCE inflation, and flat consumer spending and manufacturing output support this possibility. Market odds for a rate cut currently exceed 85%. While the Nasdaq-100 gained 1%, Treasury yields rose due to potential rate hikes in Japan. Key events next week include the Fed decision, employment cost index, and job openings data.

What This Means for You:

• Borrowers may benefit: A rate cut could lower mortgage and loan interest rates, making financing more affordable.
• Investors should diversify: Consider balancing portfolios as different asset classes react differently to rate changes.
• Monitor inflation: While slowing, core inflation remains elevated; adjust spending and savings strategies accordingly.
• Watch global markets: International developments like Japan’s potential rate hike could impact U.S. markets.

Original Post:

This Week

This week saw mixed data that mostly supported a rate cut from the Federal Reserve next Wednesday.

1. Labor market data were weak for November. ADP showed 32,000 private sector job losses, while the employment subindexes in the Manufacturing and Services PMIs stayed in contraction for 10 and 6 months straight, respectively.
2. Core PCE inflation slowed for the first time since April, easing to 2.8% YoY in September from 2.9%, as softer core services inflation more than offset an increase in core goods inflation to a 2¼-year high.
3. Activity data were soft, too, with real consumer spending and manufacturing output both flat in September.

So, market odds for a rate cut next week continue to hover above 85%.

With a rate cut looking more likely, the Nasdaq-100® ended the week up +1% (blue line), but 10-year Treasury yields were up over 10 basis points to 4.15% (black line), partly driven by Japan’s potential rate hike.

Next Week

Here are five events I’m watching next week:

1. Fed decision, press conference and Summary of Economic Projections on Wednesday
2. Q3 Employment Cost Index (Fed’s preferred wage metric) on Wednesday
3. October JOLTS Job Openings, Hires, Quits, and Layoffs on Tuesday
4. Q3 Productivity Growth on Tuesday
5. November NFIB Small Business Optimism on Tuesday

Extra Information:

Federal Reserve Meeting Calendar – Track upcoming FOMC meetings and decisions.
PCE Inflation Data – Historical personal consumption expenditures price index data from FRED.
BLS Employment Situation – Official employment statistics from the Bureau of Labor Statistics.

People Also Ask About:

• How do Fed rate cuts affect the stock market? Rate cuts typically boost stocks as borrowing costs decrease and economic activity may increase.
• What is the difference between CPI and PCE inflation? PCE includes a broader range of expenditures and adjusts for consumer substitution, while CPI focuses on urban consumers’ out-of-pocket expenses.
• Why are Treasury yields rising when a rate cut is expected? Global factors like potential rate hikes in other countries can push yields up despite domestic rate cut expectations.
• How often does the Federal Reserve meet? The FOMC meets eight times per year to set monetary policy.
• What does contraction in PMI mean? A PMI below 50 indicates economic contraction in that sector.

Expert Opinion:

“While current data supports a rate cut, investors should remain cautious. The Fed must balance slowing growth against still-elevated inflation, and global monetary policy shifts could create unexpected volatility. This potential cut may mark the beginning of a new phase in monetary policy rather than a one-time adjustment.”

Key Terms:

• Federal Reserve interest rate decision 2023
• Core PCE inflation trends
• Impact of Fed rate cuts on markets
• Labor market contraction indicators
• Global monetary policy coordination
• Treasury yield curve movements
• FOMC economic projections analysis

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