The November interest rate meeting is scheduled for the same time as the US general election, so the Fed has postponed it by a day. The policy meeting will now take place on November 6-7, with the rate decision announced at 3:00 AM Beijing time on November 8 (Friday).
See also: This Billionaire Investor Sees the US Election Risks, Braces for Even More Inflation Trades
Following the initial rate cut by the Federal Reserve, the discussion has moved from “when” cuts would start to “where” interest rates are expected to go from here.
In case you missed it, here’s a recap of what happened when Fed slashed rates by 50bps in September.
Economists often focus on the Fed’s neutral rate, or “r-star”—basically, the rate that keeps the economy steady without speeding it up or slowing it down. It’s the key measure for whether the Fed’s policy is tightening or loosening.
Think of R-star as the “Goldilocks zone” for interest rates—not too high, not too low, but just right to keep prices stable and maximise employment. Although R-star plays a key role in guiding Fed policy, it’s hard to pinpoint.
Understanding the neutral rate is crucial because it helps central bankers to determine whether their monetary policy is accommodative, neutral, or restrictive. This insight helps them effectively use one of their main tools—interest rates—to either curb or stimulate economic activity.
The main concern is that the neutral interest rate could be higher than what the Fed expects.
If that’s the case, the Fed might end up cutting rates too much, which could lead to another surge in inflation.
If this situation happens, the bond market is likely to feel the effects first.
However, if volatility causes inflation to stay high, it could quickly affect the stock market, forex, and other markets as well.
Some market indicators, such as the difference between 5-year US Treasury yields and the yields on inflation-protected bonds of the same maturity, seem to reflect these anxieties.
Since the Fed’s initial rate cut target last month, this spread—commonly known as the 5-year break-even inflation rate—has already bounced back, suggesting that some investors are anticipating more persistent inflation in the future.
Source: Federal Reserve Bank of St. Louis
After an unexpectedly weak jobs report caused a global stock market sell-off, numerous critics argued that the Federal Reserve seemed to be falling behind, with some even advocating for emergency rate cuts.
Federal Reserve officials often discuss this rate to help clarify the complex decisions they’re making, but even they have varying opinions on it.
Fed Board member Bowman voted against the decision to lower the policy rate target by 50 bps in September, marking the first dissent since 2005.
Additionally, other Federal Reserve officials share skepticism about this decision. Atlanta Federal Reserve President Bostic mentioned to The Wall Street Journal that he is open to keeping rates steady during the last two policy meetings of the year.
According to the CME Group’s FedWatch tool, traders forecast a 98% chance of a 25-basis-point rate cut by the Federal Reserve in November.
Source: CME Group
While this week’s policy meeting may not bring many surprises, Federal Reserve policymakers are grappling with a challenging economic puzzle: the U.S. labour market shows signs of cooling, yet consumer spending remains strong.
It’s unclear how long these trends of steady spending and a slowing labour market will persist, as these figures are revised every month.
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