Recently, Federal Reserve officials have been more cautious about further interest rate cuts, while a series of optimistic economic data has sparked speculation about pausing rate cuts. However, some analyses suggest that a slowdown in inflation and employment growth will provide conditions for the Fed to continue cutting rates.
The report indicates that the Federal Reserve may be developing a two-phase rate cut framework to gradually guide rates back to a neutral level. In the first phase, the Fed will reduce the policy rate from the current tightening range to a neutral level to avoid putting more pressure on the labor market. The second phase will slow the pace of cuts once the neutral level is approached.
Currently, the Fed's policy rate is still considered to be in a tight range, suggesting there is still some room for rate cuts in the future. However, to achieve the conditions for pausing rate cuts, a significant rebound in inflation or a substantial improvement in the labor market is needed, possibilities which are currently still considered low.
In the short term, the possibility of the Fed pausing rate cuts at the December meeting is slim, unless November's employment and inflation data unexpectedly rise. Based on current data, analysts expect inflation to continue to slow, and the unemployment rate may further increase, which will support the Fed's continued rate cuts at a pace of 25 basis points per meeting until the policy rate reaches about 3%.
In the long term, if the unemployment rate can stabilize near its current level, the Fed may consider pausing rate cuts. However, this assumption does not align with current market expectations, as analysts largely believe the unemployment rate may continue to rise in November, reinforcing the necessity for further easing.
Overall, the Fed's rate cut path will be highly dependent on future inflation and employment data, and the possibility of pausing rate cuts in the short term remains low. The market needs to pay attention to upcoming economic indicators to assess potential changes in policy direction.
