Powell is likely to suggest that rate cuts could either slow or accelerate, but the Fed chief is unlikely to endorse hawkish bets for a Fed pause amid recent data showing a softer pace of inflation and slower job gains, analysts at Citi said in a note.
“Instead, we believe he will leave options open for either slowing or accelerating rate cuts at 2PM Thursday – a dovish message relative to the market focus,” Citi analysts Andrew Hollenhorst and Veronica Clark said.
The Fed is expected to deliver a 25 basis rate cut at the conclusion of its two-day meeting on Thursday.
Recent market bets have swayed toward expectations that the U.S. economy may not cool sufficiently for the Fed to continue its plan to reduce policy rates to neutral. Citi analysts, however, argue that the latest data points strongly in the opposite direction.
The softer-than-expected jobs report for October, after accounting for hurricane and strike effects, along with core PCE inflation running close to target and the employment cost index slowing to 3.2% annualized, are likely to keep Powell from endorsing a hawkish view, the analysts said.
“Fed officials had prepositioned to dismiss any weakness in the October jobs report, which will moderate the dovishness of the response,” they added, referring to comments made by Governor Waller on October 14th.
Citi expects little debate about cutting rates by 25 basis points at the November meeting. The December rate cut decision will depend on labor market data, with Citi expecting another 50 basis point cut.
The analysts also pointed out that the FOMC meeting will be held just after the U.S. presidential and congressional elections. They expect Powell to emphasize that monetary policy will react to macroeconomic developments, not proposed new policies, if asked about the election’s impact on Fed policy.
Regarding the balance sheet reduction, Citi analysts believe Fed officials are unconcerned by the modest pickup in funding rate volatility and could be comfortable running reduction well into 2025.
“We expect Chair Powell to also reflect that reserves are ‘more than ample’ and that there are no near-term plans to wind down balance sheet reduction,” they added.
