Fed rate cut expected, but QT end less certain
6 min read
Despite the government shutdown that has postponed release of most economic data, economists believe the Federal Open Market Committee will
The government produced the consumer price index with a skeleton staff in order to calculate cost-of-living adjustments for Social Security recipients.
That data “pretty much locks down expectations for the Fed to cut by 25 basis points,” said D.A. Davidson
“Before the CPI number, the Fed was highly likely to cut 25 bp already, as the lack of government economic data (due to the shutdown) would be the safer response, as the labor market still appears weak,” he said.
As for the post-meeting press conference of Fed Chair Jerome Powell, Ragan expects a repeat of the statement “that the balance of risks remains tilted to employment and inflation remains elevated.”
Powell may “downplay the lack of government data,” noting alternative (mostly private) sources give sufficient information to assess economic conditions, Ragan said. “The Fed could comment on third quarter earnings trends, which have exceeded estimates so far.”
The latest Summary of Economic Projections suggested two more rate cuts this year. With the two-year Treasury yield at 3.48% Friday morning, the bond market perhaps sees a path for 3.25%-3.50%, suggesting a cut at each of the three remaining meetings in 2025, Ragan added.
The end of quantitative tightening may be near. Ragan expects Powell to announce it will end by year end.
Powell could be asked about recent bankruptcies of consumer facing companies, he said. “We think that Chair Powell will say that lower income consumers are less confident, and it bears watching.”
Expect Powell “to point to risks consistent with stagflation, something seen in October’s Beige Book, as well as uncertainty,” he said.
Tariff-induced price hikes haven’t been as “impactful as feared,” Hesser noted. “We do expect the impact of tariffs to grow over the near-term as the effects of company mitigation strategies run down. When combined with escalating trade tensions and the growing impact related to government shutdown, headwinds to growth (and employment) are mounting.”
In the absence of government jobs data, he said, “private sector sources, such as ADP and ISM, show worrisome trends on the employment front, something that points to this easing cycle being far from complete.”
The cut will be an insurance cut, said Seema Shah, chief global strategist at Principal Asset Management. “The apparent softening in the jobs market appears to have prompted a pre-emptive move to prevent further deterioration, with September’s rate reduction likely marking the start of a sequence of cuts,” she said.
But economic resilience, she added, “suggests rates are unlikely to fall meaningfully below neutral.”
She expects two more cuts this year, with easing continuing in 2026.
While a rate reduction this meeting is “locked in,” BMO Chief Economist Douglas Porter said, looking ahead, “we suspect that the near-absence of serious tariff-related inflation sets the stage for additional cuts.”
BMO sees “75 bps of further rate cuts in 2026, eventually bringing the fed funds rate to just below 3% from just above 4% now.”
Comerica Bank Chief Economist Bill Adams said his bank sees cuts this meeting and at the next FOMC meeting in December, with QT ending in January.
Wells Fargo senior economists Sarah House and Michael Pugliese noted the “government shutdown has clouded the U.S. economic outlook.”
However, they said, “the limited data that have been released suggest that gradual labor market softening has continued alongside inflation that is running at roughly a 3% underlying pace.”
The shutdown has a small but negative impact on the U.S. economy, they said, shaving 0.1 or 0.2 percentage points off quarterly growth each week, although that growth with eventually be recouped.
While “several key FOMC officials have signaled support for another rate cut in October,” they “generally have been careful to acknowledge that rate cuts past October are not guaranteed.”
Still, the post-meeting statement won’t have major language changes, they said.
As for QT, House and Pugliese said, “Our longstanding forecast has been that the FOMC would announce the end of QT at its meeting on December 9-10, with balance sheet shrinkage ceasing after December 31. We are sticking with that forecast as a base case, although we acknowledge that it is a close call and the committee may opt to end QT at the October meeting.”
While it may seem strange, given the lack of official data, DWS U.S. Economist Christian Scherrmann said the Fed will cut rates. “It is reasonable to assume that labor market conditions have not changed significantly since last month,” he said.
“The furloughing of thousands of government employees, coupled with the potential knock-on effects of the shutdown on the private sector, supports the idea that risks to employment still outweigh upside risks to inflation,” Scherrmann noted.
Despite continued uncertainty about tariffs, it seems companies remain “reluctant to pass on potential higher costs from tariffs directly to consumers,” he said.
Further, financial system health as a result of “weakness in certain credit sectors, might provide final support for a 25-basis-point interest rate reduction and an end to quantitative tightening,” Scherrmann said.
Still the government shutdown and dearth of data will make the December meeting less certain, he said. “Central bankers are likely to remain data-dependent, but this time without the data.”
Jay Woods, chief global strategist at Freedom Capital Markets, asks if the recent market rally baked in the rate cut and if a 50-basis-point cut will be needed to move markets higher.
He suggests volatility may follow the meeting, and it could “be a sell the news event.”
Still Woods added, “Any sell-off should set us up for a rally later in the year and pick up steam as we head into the final earnings season of 2025.”
The tone and language in the post-meeting statement will get attention from traders, he said. “Watch the direction of the market as Powell answers questions and the trend as we close out the day on Wednesday. That should be the tell of the market’s direction going forward the rest of the month.”
Also of interest, Woods said, will be dissents, if any, from those seeking bigger cuts, or no cuts. “It’s most likely the Fed vote will be nearly unanimous, but this Fed has been under the microscope like no other and could use this opportunity to make their own opinion known.”
The CPI was mixed news, he said. While slightly below expectations, the annual numbers were the highest since January, Woods noted. Given the Fed’s focus on employment, while the above target inflation level will raise eyebrows, it won’t deter the Fed from cutting at this and the December meeting, he said.
“The troubling thing about the data is the trend is moving away from their stated 2% goal,” Woods said. “The good news is that while inflation is ticking higher it is not running away.”
The Fed, he said, has “ample room to cut and remain dovish.”
While CPI coming in slightly below expectations “reduces immediate inflationary panic,” said Joe Tigay, portfolio manager at Rational Equity Armor Fund, it “sets the stage for a continuation of accommodative policy.”
While the latest inflation report suggests some stabilization, he said, “the broader economic picture remains bifurcated.”
J.P Morgan’s Jay Barry, Phoebe White, Liam L. Wash and Amanda Berke expect the Fed to announce the end of QT at this meeting.
