Fed tipped to cut interest rates by 25 basis points this week

Investing.com – The Federal Reserve is widely expected to deliver a 25-basis point interest rate cut at the conclusion of its latest two-day policy meeting on Thursday, following the central bank’s decision to roll out a jumbo 50-basis point reduction in September.

Friday’s US jobs report all but cemented expectations for a smaller rate cut. The economy added far fewer jobs than anticipated in October, although the figures were impacted by devastating recent hurricanes and ongoing labor actions.

Nonfarm payrolls rose by 12,000 during the month, falling from a downwardly revised 223,000 in September. Economists had expected a reading of 106,000. Jobs growth for the prior two months was also revised lower, indicating that the labor market is gradually cooling.

Crucially, the Labor Department noted that it was the first survey collected since Hurricanes Helene and Milton smashed into the US Southeast, causing severe damage in the region. But officials were not able to say exactly how much the storms dented the jobs report.

“It is likely that payroll employment estimates in some industries were affected by the hurricanes; however, it is not possible to quantify the net effect on the over-the-month change in national employment, hours, or earnings estimates because the establishment survey is not designed to isolate effects from extreme weather events,” the Labor Department said in a statement.

Meanwhile, the overall unemployment rate came in at 4.1%, matching both the prior month’s rate and economist projections. Average hourly earnings also ticked up by 0.4% from a downwardly revised 0.3%.

The key federal funds rate now stands at a range of 4.75% to 5% following the half-point reduction in September. Fed officials have said the outsized cut in September aimed to help bolster labor demand during a time of fading inflationary pressures.

According to CME Group’s (NASDAQ:CME) closely-monitored FedWatch Tool, markets are currently pricing in a 99.7% chance the Fed will bring down borrowing costs by a quarter point. There is also an 81.5% probability the central bank will do the same again at its December gathering.

Investors are hoping the Fed’s statement and comments by Chair Jerome Powell will provide more insight into whether officials believe economic resilience will continue – and if they might cut rates more slowly as a result.

However, analysts at Deutsche Bank said Powell is unlikely to provide forward guidance about the policy path ahead.

“While he will continue to frame the outlook as tilted towards normalizing policy over time, we expect he is likely to note that future reductions will be data dependent and occur on a meeting-by-meeting basis,” the analysts said.