Fed Likely to Cut Rates Amid Easing Inflation

(Reuters) – Federal Reserve policymakers are very likely to proceed with a cut in short-term U.S. borrowing costs by a quarter percentage point next week. Traders speculate this following economic data indicating a decrease in price pressures.

Inflation, as measured by the Fed's target, the year-over-year increase in the personal consumption expenditures index, was 2.1% in September, down from an upwardly revised 2.3% in August, according to a Commerce Department report. The Fed aims for 2% inflation.

A Labor Department report showed the Employment Cost Index rose by 0.8% in the third quarter compared to the previous quarter, which is less than economists had predicted and marks the smallest increase since the second quarter of 2021.

The increase in labor costs previously alarmed Fed policymakers, prompting them to adopt tighter policies.

Cory Stahle, an economist at Indeed Hiring Lab, stated: "Policymakers at the Federal Reserve are likely to be encouraged by this data as wage growth measures at levels consistent with less inflation."

Futures contracts tied to the Fed's policy rate suggest that there is about a 94% chance of a 25 basis point cut next week, with a 70% chance for another 25 basis point cut in December.

These reports, the last major economic data before the Fed's Nov. 6-7 meeting, indicate that the struggle against inflation is ongoing. The core PCE price index, which excludes volatile food and energy prices, increased to 2.7% from a year earlier, above the 2.6% economists expected and matching the rise from the previous month.

Analysts warn that this could lead the Fed to lower the policy rate to a range of 4.5%-4.75% next week and likely hold it there. Michael Landsberg, chief investment officer at Landsberg Bennett Private Wealth Management, commented, "We believe the Fed will pause any rate cuts in December amid fears about a re-acceleration of inflation."