The US Federal Reserve is widely expected to cut its interest rates by 25 basis points today. Fed chief Jerome Powell is set to announce the outcome of the bank's FOMC meeting later today.
The Federal Reserve will reduce its key interest rate by 25 basis points today and again in December, according to a Reuters poll of economists who remain deeply divided on where rates will be by the end of next year.
Here's what a poll of economists found:
As part of the Reuters poll, 115 economists out of 117 predicted that the Fed will lower the interest rate again by a quarter point to 3.75-4 percent on October 29. Two expected a 25-bps cut in October and a 50 bps cut in December.
Notably, a month ago, economists had expected just one more cut this year. But the new forecast comes after a recent shift in expectations by Fed policymakers toward additional reductions. Several factors could lead way for a rate cut today:
Softer-than-expected inflation:
The already-elevated inflation levels continued to increase in the month of September, but it was lower than expected. Core consumer price index, excluding the often-volatile food and energy categories, increased 0.2 percent from August, according to Bureau of Labor Statistics data. This was the slowest pace in three months.
This further increased expectations of a rate cut by the US Federal Reserve. "It would be fair to say approximately half of the current FOMC is more focused on the labor market and the other half on inflation risks," said Ryan Wang, US economist at HSBC.
Weakening labor market:
The American labor market remained mired in its low-hiring, low-firing doldrums through September, though the economy "may be on a somewhat firmer trajectory than expected," Federal Reserve Chair Jerome Powell had said earlier this month. He noted that policymakers will take a "meeting-by-meeting" approach to interest rate cuts as they balance job market weakness with above-target inflation.
"You do have a bit of tension between labor market data - we see very low levels of job creation - and yet people are spending," Powell said. "We are going to have to see how that plays out,” he added.
Notably, the US government shutdown has led to delay in official data on job growth being released.
What analysts say:
"The difficulty for the Fed is whether this job slowdown mainly reflects bigger labor demand versus labor supply. It's harder to be very precise about which factor is the bigger one, and that does have implications for how monetary policy should react to it,” said Wang from HSBC.
“While the Fed is expected to cut rates by a quarter point, traders will scrutinise the accompanying statement and Chair Jerome Powell's comments for signals about future cuts,” said Devarsh Vakil, Head of Prime Research at HDFC Securities.
"While a good chunk of the committee would probably like to signal that a December ease shouldn’t be taken for granted, we think this alternative wording choice might be too hawkish for the leadership," wrote JP Morgan Chief U.S. Economist Michael Feroli.
Also read: Our LIVE blog on stock market updates
(With inputs from Reuters)
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