The Federal Reserve’s November meeting is shaping up to be a pivotal moment in the ongoing economic landscape, driven by a confluence of factors that are reshaping market expectations. Traders, who initially anticipated an aggressive 50-basis-point rate cut, are now leaning towards a more measured approach, with a 25-basis-point reduction gaining favor, and even a potential pause in the Fed’s easing cycle emerging as a serious possibility. This shift in sentiment is a direct result of the U.S. economy’s surprising resilience, defying predictions of a slowdown and exhibiting robust growth. The latest data points to a strong labor market, with September seeing a staggering addition of 254,000 nonfarm payrolls, significantly exceeding forecasts and the 12-month average. The unemployment rate unexpectedly fell to 4.1%, and wage growth accelerated, exceeding economists’ expectations across the board. These positive economic indicators are making it increasingly difficult for the Fed to justify additional aggressive rate cuts in the near term. Adding fuel to the fire, geopolitical tensions in the Middle East have escalated dramatically, further complicating the Fed’s decision-making process. The ongoing conflict between Israel and Hezbollah, fueled by Iran’s missile attacks and the threat of Israeli retaliation, has sent oil prices skyrocketing by over 11% in just five days. West Texas Intermediate crude has breached the $77 per barrel mark, pushing inflationary pressures higher and prompting traders to consider the option of a hold in interest rates. This confluence of factors, including a robust economy and rising inflationary risks, has led to a complete reversal in market sentiment. The probability of a 50-basis-point rate cut in December has been completely priced out, and attention has shifted to whether the Fed will maintain current rates in November. Market-implied probabilities of a hold have surged to 14%, a significant increase from just 2% on Friday and 0% the previous week, according to the CME FedWatch tool. This shift in expectations has pushed 10-year bond yields back above the 4% mark, a trend not typically observed in a rate-cut environment. On Monday, the U.S. Treasury 10-Year Note ETF UTEN dropped 0.4%, marking its fourth consecutive negative session. The strong economic data and escalating inflationary pressures have prompted several economists and analysts to advocate for a more gradual approach to rate cuts. Bank of America economist Aditya Bhave stated, “The data flow since the Fed’s 50bp September cut has been remarkably strong. Another 50bp cut isn’t warranted.” He predicts that the Fed will adopt a more measured approach, cutting rates by 25 basis points per meeting until March 2025. Analyst Michael Gayed, CFA, echoed this sentiment, stating, “Right now, a series of more modest 25 basis point cuts would serve to help normalize conditions based on the latest data without getting too aggressive. I’m still concerned that falling rates while the economy is still in good shape runs the risk of another round of inflation.” Veteran Wall Street investor Ed Yardeni outlined 12 compelling reasons why the Fed should pause rate cuts in November, highlighting the robust economic performance, potential for regret over the September cut, and the inflationary pressures stemming from geopolitical events, rising oil prices, and increased fiscal spending. With the economic landscape evolving rapidly, the Fed’s decision in November will have far-reaching consequences. The central bank faces a delicate balancing act, seeking to navigate the complex interplay of economic growth, inflation, and geopolitical uncertainties. The outcome will have significant implications for the financial markets, the broader economy, and the trajectory of the U.S. dollar.
Fed’s November Meeting: From Aggressive Cuts to Potential Pause
