Factors Driving Potential Rate Cuts
One reason for more aggressive rate cuts is the impact of lower inflation on businesses. As inflation declines, companies that were able to raise prices this year may face difficulties doing so in the future. To protect profits, they may resort to trimming labor costs. Additionally, holding the benchmark rate steady with falling inflation raises real borrowing costs, necessitating a reduction in the policy rate to prevent overtightening.
BMO economist Scott Anderson argues that if the Fed decides on more aggressive easing, it will be due to inflation concerns rather than growth or unemployment spikes. The upcoming months will provide more data before the Fed’s next meeting at the end of January. These data include the U.S. unemployment rate, which currently stands at 3.7%, just a slight increase from when rate hikes began.
Fed Voter Rotation and Potential Impact
Next year, the four Fed bank presidents rotating into their voting positions are expected to support fewer rate cuts than their predecessors. However, this could change depending on various evolving factors. Federal Reserve policymakers engage in ongoing policy debates that shape decisions, with all 19 policymakers participating, including non-voters.
The overall impact of the rotating voters may be less significant than the data itself. Factors such as easier financial conditions and unexpected job growth could influence inflation and economic decisions, potentially adding fuel to borrowing and investment. Ultimately, although geopolitical shocks may impact policy, the Fed is unlikely to adjust unless the shock is long-lasting. With the current policy rate, weaker spending and job gains are anticipated for the upcoming year.