Analysts at Schwab on Tuesday stated that the Federal Reserve cutting interest rate in December is “far from certain,” even as two cuts are widely expected.
In their latest note, Schwab analysts pointed to the Consumer Price Index (CPI) remaining above the central bank’s target of 2%, despite noting that it came in mild. The annual inflation rate stood at 3% in September, according to data from the Bureau of Labor Statistics (BLS), lower than the Wall Street consensus of 3.1%.
Schwab analysts noted that a Fed rate cut this week is “pre-ordained.” According to data from the CME FedWatch tool, there is a 97.8% probability of a 25 basis point rate cut during the October meeting. “It looks like a rate cut by the Fed next week is all but a sure thing,” said Kathy Jones, Schwab’s chief fixed income strategist.
However, the firm noted that things could turn out differently after October.
Fed’s Ultimate Nightmare
There are growing concerns about the weakness in the labor market. Jefferies’ Chief Market Strategist, David Zervos, cautioned that the Fed will have to consider the possibility of far fewer jobs being created despite the U.S. economy growing at a healthy rate.
However, analysts at Schwab remain concerned about inflation. Even as more than half of Fed officials expect two more rate cuts in 2025, the firm said it’s not a given yet.
“For Fed policy makers, the ultimate nightmare would likely be having to re-adjust rates back up to fight inflation triggered in part by cutting too dramatically. This happened in the 1980s and has become a third rail for the central bank. Institutional memories are long,” the firm said in its note.
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