Despite the limited availability of data, a 25 basis-point rate cut is widely expected to be announced following today’s Federal Reserve meeting.
Amid the uncertainty stemming from the ongoing US government shutdown and the delayed release of the October Non-Farm Payrolls (NFP) report, market participants reacted positively to last week’s weaker-than-expected US Consumer Price Index (CPI) data for September. Headline CPI increased by 3.0% year-on-year, slightly below the consensus forecast of 3.1%, though marginally higher than August’s 2.9%. Core CPI also undershot expectations, rising 3.0% year-on-year compared to 3.1% in the previous month.
The moderation in headline inflation was largely driven by slower price growth in housing-related components and services. However, prices for tariff-sensitive goods remained relatively resilient, limiting the overall decline.
Against the backdrop of a labour market showing early signs of softening, Federal Reserve Chair Jerome Powell has recently tempered his tone, noting that the balance between inflation and employment has become more even. This shift suggests that additional labour market weakness could strengthen the case for further monetary easing. With September CPI now below expectations, markets are fully pricing in a 25 basis-point rate cut today, with an additional reduction potentially on the table for December.
Indeed the Federal Reserve is becoming increasingly aware of a labour market that is showing signs of weakening.
September’s Non-Farm Payrolls (NFP) report revealed an increase of 50,000 jobs—an improvement from August’s weak figure of 22,000 but still well below the consensus expectation of 75,000. Meanwhile, job openings continue to decline, and the unemployment rate rose steadily to 4.3% in September, marking its highest level since October 2021.
Concerns about the labour market’s strength are further compounded by the delayed release of October’s NFP report due to the US government shutdown, alongside recent announcements of job cuts from major employers, such as Amazon, Target, Applied Materials, and Rivian, indicating a potential slowdown.
In his recent remarks at the National Association for Business Economics, Federal Reserve Chair Jerome Powell stated that the outlook for inflation and employment has remained stable since September. However, he also acknowledged growing downside risks to employment, implying that the Fed may prioritise its employment goals more heavily in the near term.
This evolving stance reflects the Fed’s increasingly delicate balancing act between managing inflation and supporting labour market conditions. As a result, market participants are closely monitoring the possibility that the Fed may respond more proactively to further labour market deterioration, even if inflation temporarily exceeds its target.
We do not anticipate any formal guidance regarding the December meeting this week. However, if Chair Powell is asked, he will likely feel comfortable referring to the September dot plot, which suggests a third-rate cut in December. We continue to believe a rate cut in December is highly probable for several reasons:
- First, the dot plot established the third cut as the baseline expectation, and the market has fully priced it in.
- Second, the Federal Open Market Committee (FOMC) has historically implemented risk management rate cuts in groups of three, often completing the set even when conditions appeared less concerning by the time of the third cut.
- Third, we doubt the upcoming labour market data will provide a definitive green light by the December meeting. The anticipated DOGE deferred resignations are expected to produce a negative payroll report in October and potentially affect November’s figures as well. Even if these impacts are already anticipated, skipping a previously signalled rate cut shortly thereafter would be awkward. Moreover, the ongoing government shutdown has disrupted October’s data collection and may also impact November’s, potentially causing distortions or incomplete data that could reduce the reliability of labour market signals available in December.
Looking ahead, we expect the economy to gain modest strength next year as the drag on GDP growth from tariff increases eases, fiscal stimulus takes effect, and financial conditions remain accommodative. Stronger activity should help stabilise the labour market; however, it remains uncertain whether this improved policy stance will be sufficient to avert an extended period of jobless growth.
