Fed’s Rate Decisions and Labor Market Outlook

Investing.com — The Fed is likely to downshift to smaller cuts at its remaining two policy meetings for the year, but a significant impact on the labor market could necessitate another substantial cut to safeguard the economy.

Despite the faster-than-expected initial cut, Morgan Stanley analysts suggest two 25 basis point cuts by year-end, influenced by recent economic data and Fed communications.

However, the possibility of a larger cut remains, especially if job data underperforms, with sub-100,000 job gains posing risk to their forecast ahead of the upcoming September payroll numbers. Economists anticipate 144,000 new jobs in September, up from 142,000, while the unemployment rate is expected to remain steady at 4.2%.

The Fed’s unexpected 50 basis point cut in September set the tone for future meetings, with Fed officials indicating that the labor market will heavily influence additional decisions.

“A surprise to the weak side…would push me toward needing another dramatic move,” said Atlantic Fed President Bostic in a recent interview. Fed Chairman Powell expressed caution regarding significant cuts, stating two more cuts are likely only if the economy meets expectations.

Despite signs of a cooling labor market, strong consumer spending has provided reassurance that the economy may avoid recession and achieve a soft landing. Consumer spending in August aligned with predictions, particularly in services, tracking a growth rate of 3.1% for the third quarter.

Morgan Stanley predicts a broader deceleration into year-end but maintains there won’t be a recession, with expected real GDP growth of 2.2% in Q4 compared to the same period last year.

Inflation remains moderate, with the core personal consumption expenditures price index slightly below expectations at 2.6% for 2024, consistent with the Fed’s median forecast from the September Federal Open Market Committee meeting.