Financial markets are buzzing with expectations that the Federal Reserve may announce a quarter-point interest rate cut in November. However, some analysts are considering the possibility that the Fed might pause its rate-cutting cycle soon.
After the Federal Reserve’s last rate cut in September, which was a significant move, market expectations have shifted. Initially, investors believed there was a decent chance of a larger 0.5% cut in November. Yet, recent data now suggests a quarter-point cut is the most likely outcome, while the odds of a larger cut or even no cut have nearly disappeared. Several economic indicators point toward the Fed’s likely decision to proceed with a rate cut. The U.S. economy grew at a 2.8% annual rate in the third quarter, and inflation continued to ease in September.
These data points imply that the Fed’s actions to control inflation have been effective without hindering economic growth too much. Meanwhile, the labor market has shown signs of cooling down, a trend that began after the pandemic-driven surge in employment, giving the Fed more room to consider further easing.
The Fed’s Interest Rate Decisions Could Impact Your Investments in various ways. Lower rates generally make borrowing less expensive, encouraging consumer spending and business expansion, which can drive economic growth and support stock prices. However, if the Fed signals a pause, it might reflect confidence in the economy’s strength but could also slow the pace of growth in the long term. As the Fed balances inflation control with economic stability, understanding these decisions can help investors make informed choices about portfolio adjustments.
Why Another Rate Cut Now?
One primary reason for another rate cut is to ease economic pressure without straining the labor market further. With inflation no longer an immediate threat, the Fed has more flexibility to carefully lower interest rates without risking a spike in prices.
The “neutral rate” is a concept the Fed considers—essentially an interest rate that doesn’t stimulate or restrict the economy. This neutral rate is estimated to be around 2.5%, yet the current federal funds rate sits between 4.75% and 5.00%, which is above neutral and considered restrictive. Bringing rates closer to this neutral level would help support economic stability.
A recent jobs report, while showing some impact from weather disruptions and labor strikes, adds to the case for another rate cut. Even with some uncertainty in the labor data, the Fed is expected to proceed with a 0.25% rate cut in November, giving a moderate boost to the economy while inflation remains under control.
Possibility of Pausing Rate Cuts
While a rate cut in November seems likely, the Fed may consider slowing down or pausing cuts in the future if economic data remains strong. The bond market currently anticipates about 1.25% in rate cuts by the end of 2025, indicating that not every Fed meeting will lead to a cut.
If inflation continues to gradually decline, the Fed may feel comfortable skipping rate cuts at certain points next year. If the pace of economic growth remains steady, and inflation steadily moves towards the Fed’s target, a pause could be likely after December.
The Fed has shown a preference for patience, aiming to avoid cutting rates too quickly and potentially reigniting inflation. This approach allows the Fed to assess inflation’s progress carefully and make adjustments only when the economic outlook justifies it.
What Would This Mean For Investors?
For investors, easing inflation provides a sense of stability. Unlike the aggressive rate hikes of the past two years aimed at controlling high inflation, the Fed’s current position allows for a more balanced approach. If economic growth continues at a steady rate, the Fed can gradually reduce rates over time. However, if economic data shows signs of significant weakening, the Fed could cut rates more aggressively to prevent an economic slowdown.
With inflation slowly aligning closer to the Fed’s target, the Fed has room to be flexible in its approach. Investors may find reassurance in the fact that the Fed is taking a cautious, data-driven approach to managing interest rates. This approach helps minimize risks to the economy and financial markets.
Ultimately, the path of future rate cuts will depend on economic performance, especially inflation and growth metrics. The Fed’s cautious strategy aims to support both economic stability and gradual growth, which is beneficial for markets overall.
