The jobs report published last week was interpreted by many experts as a kind of signal of the inevitability that in the current month, the Federal Reserve System will make another decision on cutting interest rates, but this answer to the question of what happens next faces a symbolic twilight of uncertainty.
The November nonfarm payrolls were generally neutral. In this case, the concept of neutrality should be interpreted as the absence of unambiguous pessimistic information and unambiguously optimistic data. At the same time, for the central bank of the United States, against the appropriate background, what can be described as complete freedom of action is being formed. The reaction of the market, which, according to the CME Group gauge, estimates the probability of a December lowering of borrowing costs as almost 90%, confirms the mentioned thesis.
At the same time, it is highly likely that shortly, the central bank of the United States will face discussions about the most appropriate pace of monetary policy easing and the most constructive scale of these measures in terms of compliance with economic reality.
Joseph LaVorgna, chief economist at SMBC Nikko Securities, said during a conversation with media representatives that financial conditions in the US have eased massively. At the same time, the expert noted that the central bank of the United States risks creating a speculative bubble. According to Joseph LaVorgna, there is currently no reason for cutting interest rates. The expert said that the Fed should pause as part of monetary policy easing.
It is worth noting that skepticism about the high-intensity or relatively rapid lowering of borrowing costs by the US financial regulator is not what can be called a lonely opinion or a kind of marginal point of view.
Chris Rupkey, senior economist at FWDBONDS, said that the Fed does not need to think through measures to stimulate the economy, because jobs are plentiful. Also, according to the expert, the announced intention of the central bank of the United States to continue cutting interest rates looks increasingly unwise, given the fact that the fire of inflation has not yet been extinguished.
Jason Furman, a former White House economist under Barack Obama, noted caution about further easing of the Fed’s monetary policy. The expert underlined that the recent pace of average hourly earnings increases is more consistent with an inflation rate of 3.5%, not the 2% US financial regulator prefers. According to a former White House economist, the latest jobs report is another data point in the no-landing scenario. Jason Furman does not doubt that in December the Fed will decide on lowering the cost of borrowing. At the same time, the expert noted that it is currently unknown when there will be subsequent interest rates cutting.
November’s payrolls data showed an increase of 227,000. The corresponding result was better than preliminary expectations. This information will be taken into account by the central bank of the United States when deciding on interest rates. The unemployment rate in the US in November was fixed at 4.2%.
Also, in the context of factors impacting decisions related to the monetary policy of the central bank of the United States, it is worth noting that inflation is increasing in the country. In October, the Fed’s preferred measure rose to 2.3%. Wage gains continue to be robust. The current 4% exceeds the pre-Covid period going back to at least 2008.
Moreover, the question of the fiscal policy of Donald Trump, who won the United States presidential election last month and will return to the White House in January, is relevant. Also, many experts are concerned about the potential consequences of the implementation of Mr. Trump’s intentions related to the increase in tariffs on imported goods. According to several analysts, the materialization of such decisions in the space of trading reality can provoke an acceleration of inflation.
At the same time, the United States economy is showing strong growth. The Atlanta Fed expects US gross domestic product (GDP) to increase by 3.3% year-on-year in the fourth quarter of 2024.
There is also the issue of financial conditions, a metric that includes such things as Treasury and corporate bond yields, stock market prices, mortgage rates, and the like. Fed officials believe the current range in their overnight borrowing rate of 4.5%-4.75% is restrictive. At the same time, the US financial regulator’s own measure indicates that the mentioned conditions have been the loosest since January.
Last week, Fed chairman Jerome Powell said that the current economic situation in the United States allows the central bank to move slowly in the context of making any changes to monetary policy.
Also last week, Cleveland Fed president Beth Hammack noted the strong growth of the US economy. Also in this context, was underlined the need for additional evidence that inflation is confidently approaching the target mark of the central bank of the United States at 2%. Beth Hammack is a proponent of slowing down in cutting interest rates.
The December lowering of the cost of borrowing may be canceled by certain contents of reports on consumer prices and producer prices, which will be published this week. Preliminary forecasts indicate that the consumer price index will grow by 2.7%.
Also currently relevant is the issue of a neutral rate, which does not limit or stimulate the upward dynamic of the economy. This issue is central to the context of how the Fed will conduct monetary policy. Recent data suggest that the corresponding level may be higher than it has been in previous economic situations.
Tom Porcelli, chief US economist at PFIM Fixed Income, said the Fed could decide to cut interest rates in December, not take similar actions in January, and lower borrowing costs again shortly after the first month of 2025 before taking a break.
Jerome Powell and his fellow policymakers state that they currently pay equal attention to controlling inflation and supporting the labor market, although previously there was a focus on the dynamic of prices.
