On November 13 local time, several Federal Reserve officials spoke out to pour cold water on the market's rapidly rising expectations of interest rate cuts.
In one of his most closely watched speeches, St. Louis Fed President Alberto Musalem reiterated that he believes current interest rates are "closer to neutral than significantly tight," meaning the Fed can continue to wait and see without excessive easing, but there is limited room for further significant rate cuts.
The pricing in the futures market has also adjusted accordingly. According to data from the CME FedWatch tool, after a series of cautious comments from officials , traders' bets on another Fed rate cut in December have fallen from over 60% to around 50% , reflecting a cooling of market confidence in a December rate cut.
Officials collectively cool down expectations for a December interest rate cut
At an event at the University of Evansville, Indiana, Musallem stated that after two rate cuts this year, "policy rates are closer to neutral than slightly tightening." In his view, U.S. inflation is currently around 3%, above the 2% target, and "it is still necessary to combat high inflation while providing some support to the labor market." He anticipates the U.S. economy will be slightly weak in the fourth quarter, but is expected to return to trend growth or even slightly higher levels in the first quarter of next year.
Musalem admitted that his earlier support for interest rate cuts stemmed more from concerns about employment. However, given the continued stickiness of inflation and the relatively resilient economic performance, he said that "more caution is needed" to prevent excessively loose policies.
On the same day, other regional Fed presidents also sent similar signals. Cleveland Fed President Beth Hammack stated that interest rate policy should remain in a "restrained range" to continue exerting downward pressure on inflation, which is still above target; Minneapolis Fed President Neel Kashkari said that inflation of around 3% "remains too high," and some labor market indicators are already showing signs of stress, making it unwise to ease too quickly.
San Francisco Fed President Mary Daly also noted that after two rate cuts this year, the risks to the Fed’s two goals of “full employment” and “price stability” have largely returned to equilibrium, but service sector inflation has not yet shown a sustained decline, and the market needs to be more restrained in its expectations for further easing.
In his commentary, Bob Doll, CEO and Chief Investment Officer of Crossmark, noted that the market has high hopes for an interest rate cut, but judging from the latest statements from Federal Reserve officials, it is "more of a possible option than a committed path," and investors need to be prepared for interest rates to remain at higher levels for a longer period.
Data gaps amplify uncertainty
As policy communication becomes more cautious, the Federal Reserve is facing an undeniable reality: due to the prolonged government shutdown, official employment and inflation data were interrupted, forcing policymakers to rely more on private and survey data from sources such as ADP, Challenger, and the University of Michigan to piece together an incomplete picture of the economy.
These data all point in the same direction—the labor market is shifting from "overheating" to "cooling down." ADP's latest estimates show that the private sector added 42,000 jobs in October, but its weekly data reflects an increase in weekly layoffs, indicating a slowdown in job growth. Meanwhile, a report from Challenger, Gray & Christmas shows that companies announced 153,000 layoffs in October, more than double the number in September, marking the highest monthly figure since 2003.
Consumer sentiment is also weakening. The University of Michigan's preliminary November consumer sentiment index fell to 50.3, the lowest since 2022, with respondents' expectations for employment and income prospects deteriorating significantly. These signals are leading the market to increasingly believe that the labor market is no longer in a "hot" phase, and that the Federal Reserve has reason to continue discussing easing options.
Finding a balance between incomplete data, persistently high inflation, and weakening employment has become a new challenge for the Federal Reserve. When discussing this issue, Musalamu acknowledged that restoring credible and sustainably updated official data is crucial, but stated that the Fed is not currently "groping in the dark." Through financial market interest rates, the repurchase market, and the payment system, the Fed can still form a "reasonable assessment" of the economic situation.
(Article source: CBN)
