Economics & Growth | Monetary Policy & Inflation | US
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Summary
- The Fed is likely to cut 25 basis points, as well as end QT, without committing to a cutting cycle.
Market Implications
In line with market consensus, I continue to expect two more cuts in 2025. I also expect three 2026 cuts, which is greater than current expectations (2.5 cuts).
Cut Without Guidance
At the October 29th FOMC, I expect the Fed to cut 25bps, but refrain from committing to further cuts. The reasons are:
- Markets are pricing about 98% risk of a cut. The Fed does not like to surprise markets. If it disagreed with this pricing, it would have signaled it.
- The data broadly signals an unchanged balance of employment and inflation risks since the September FOMC. Based on the SEP, this implies two more 2025 cuts:
- A nowcast of unemployment based on high-frequency data estimates current unemployment at 4.4%, against 4.3% in September and a SEP Q4 average forecast of 4.5% (chart 1)
- Alternative measures of employment suggest contractions over the past few months (chart 2).
- The Atlanta Fed Q3 GDP nowcast is close to 4% (chart 3). Strong growth alongside weak employment data may not be sustainable. For now, however, it implies strong productivity, which supports disinflation.
- The September CPI showed continued disinflation, driven by housing with core goods and non-housing services inflation stable (chart 4). This is in line with my LT view that inflation will surprise on the downside.
- Lack of consensus between FOMC hawks and doves on whether a cutting cycle is needed. This disagreement reflects in part the growth/employment inconsistency. Whether it gets resolved through higher employment or slower growth is still unclear (for recent comments from FOMC members, please see appendix table).
I do not expect material changes to the statement. In the presser, I will be looking for possible changes to Chair Powell’s description of the inflation/employment risks balance.
QT To End
I expect QT to end this week. The FFR has been moving up in the target range, while RP rate vol has increased (chart 5). These signal that reserves are getting close to the Fed’s “ample” levels. With the Fed RRP balance reaches zero, a further decrease in Fed bond holdings would lead to a decline in reserves and risk a loss of control over the FFR (chart 6).
| Chart 1: Unemployment Could be Up by 10bps | Chart 2: Employment Could be Contracting |
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| Chart 3: Q3 GDP Growth Twice the Trend! | Chart 4: Continued Disinflation |
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| Chart 5: Liquidity is Tightening | Chart 6: Fed to End QT |
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Market Consequences
I continue to expect two more 2025 cuts, in line with markets, and three 2026 cuts, which is more than markets (pricing about 2.5 cuts).
Appendix Table: Recent FOMC members Comments
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