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Doesn’t the Fed need data to cut interest rates? The surprising truth behind consensus

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Hello everyone, today XM Forex will bring you "[XM Foreign Exchange Official Website]: Does the Federal Reserve do not need data to cut interest rates? The surprising truth behind the consensus." Hope this helps you! The original content is as follows:

Against the www.xm-forex.complex background of receding upward pressure on inflation but slowing employment growth, the U.S. Federal Reserve is standing at the crossroads of another interest rate adjustment.

The market is generally focused on the Federal Reserve interest rate decision early Thursday morning. The October Federal Reserve survey showed that 92% of respondents (including 38 economists, strategists and fund managers) expected the Federal Reserve to cut interest rates by 25 basis points at this meeting, and 84% believed that interest rates would be cut again in December. 54% predicted that there would be a third interest rate cut in January next year. Respondents generally expected a cumulative 100 basis points of interest rate cuts this year and next, and the federal funds rate will fall to 3.2% by the end of 2026.

Economic data is clearly lacking as a basis for interest rate cuts. Why do most people still believe that the Federal Reserve will open the channel for interest rate cuts?

Interest rate cut expectations: labor market pressure dominates judgment

The formation of this interest rate cut expectation is closely related to the Federal Reserve's weighing of its dual missions. Although inflation data in September still showed resilience - the consumer price index (CPI) released by the U.S. Bureau of Labor Statistics rose by 3% year-on-year, a slight increase from 2.9% in August, and the core PCE price index increased by 3.0% year-on-year, both higher than the Federal Reserve's long-term target of 2%, but the cooling signal of the labor market has attracted more attention.

James Knightley, chief international economist at ING, pointed out that the risk of corporate layoffs is gradually emerging. Amazon has recently confirmed plans to cut about 14,000 corporate jobs, and the labor market is becoming a more pressing concern for the Federal Reserve.

It is worth noting that oil and other industries have been laying off employees recently. The essence of layoffs is that the marginal return on manpower investment in the industry is reduced, or even impossible.Covering marginal costs also means that the industry's prosperity is shrinking. If the leading www.xm-forex.companies in the industry start to lay off employees, it means that the overall profitability of the industry is declining. This does not require much data support. You can understand it by looking at the leading www.xm-forex.companies.

This judgment coincides with the view of Oxford Economics. Its report states that analysts generally believe that the risks posed by the cooling labor market are more pressing than continued price pressures. Therefore, even if inflation does not reach the target, a 25 basis point interest rate cut should still be promoted. In fact, the Federal Reserve started its interest rate cutting cycle in September, lowering short-term interest rates by 25 basis points to a range of 4% to 4.25%, setting the tone for subsequent policy adjustments.

From the perspective of policy transmission logic, Michelle Raneri, Vice President of TransUnion, explained that by lowering borrowing costs, interest rate cuts can not only reduce the debt burden of borrowers, but also stimulate credit activities. There are early signs that credit activities have increased, which has a potential supporting effect on economic recovery.

Decision-making dilemma: data supply interruption and political interference

However, the challenges faced by this interest rate cut decision are far beyond the ordinary. As of October 24, the U.S. federal government shutdown has entered its 24th day, setting a record for the second longest shutdown in history. This has directly led to the postponement of the September employment report and the suspension of most data collection work of the U.S. Bureau of Labor Statistics, which may even affect the normal release of November inflation data.

Federal Reserve Chairman Jerome Powell admitted that "there is no risk-free option" on the current policy path. Due to the lack of official data, the Fed was forced to turn to alternative data such as state-level unemployment claims reports and the ADP "National Employment Report" - the report showed that U.S. private sector employers decreased in September. There are 32,000 fewer jobs, but the validity of these data is far less than the official "gold standard." As Guy Lebas, chief fixed income strategist at Jenny Montgomery Scott, said: "Flying in a snowstorm blindfolded and without backup instruments is definitely not suitable for formulating monetary policy."

The lack of data further amplifies policy differences. The survey showed that although most people expected an interest rate cut, only 66% of respondents believed that "interest rates should be cut" and 38% clearly opposed it.

The opponents are represented by Richard Bernstein, CEO of Richard Bernstein Consulting. He bluntly stated that the current financial environment is close to historically loose levels, GDP growth remains in the 3.5% to 4% range, financial asset prices have risen sharply, and inflation is still well above the target. "In normal times, the Fed would never choose to cut interest rates," implying that political factors may interfere with the independence of decision-making.

Among the supporters, Alan Sinai, chief economist of Decision Economics, called for greater interest rate cuts, believing that "the weak labor market and government shutdowns are exacerbating the risk of recession, and it is necessary to take larger interest rate cuts in advance."

Judgments on policy risks are also polarized: 42% of respondents are worried that the Federal Reserve will cut interest rates too much, while 40% are worried that it will not cut interest rates enough. stepeLindsey Pigueza, chief economist at Ernst & Co., warned that hasty interest rate cuts in the absence of insufficient data may further aggravate policy errors if the subsequent inflation and employment conditions are not supportive. "Fed officials are currently unable to draw a clear conclusion on anything. It stands to reason that they should suspend policy adjustments and wait for more information."

Market and Economy: Opportunities and Concerns Coexist

If the interest rate cut is implemented, its impact will gradually penetrate into all levels of the economy. For ordinary people, Dimitri Silva, managing director of Reams Asset Management, pointed out that the transmission cycle of interest rate changes usually takes 6 months to 1 year, by which time interest payments on credit cards, car loans and mortgages will be reduced, and debt management pressure is expected to be relieved.

Small businesses, as the core engine of job creation, will also benefit from falling borrowing costs, easing the operating pressure caused by previously high interest rates. However, WalletHub's survey shows that although another interest rate cut may save consumers more than $1 billion in total, more than half of the respondents believe that a 25 basis point interest rate cut will not have a substantial impact on life.

But if there is no feeling at 25bp, what about continued interest rate cuts? For business accounts, if the interest sub-data becomes significantly smaller, the report will look much better, and business owners will be more active in evaluating their www.xm-forex.company and formulating future plans.

The market's expectations for the economic outlook are characterized by "short-term caution and long-term optimism." The survey shows that economic growth expectations have been raised five times in a row (since the announcement of reciprocal tariffs in April). Respondents predict that U.S. GDP growth will be 1.9% this year, rising to 2.2% in 2026, and reaching 2.3% in 2027. The unemployment rate is expected to rise to around 4.5% next year, and the inflation rate will gradually fall, to about 3% by the end of this year, and to 2.6% in 2027. Although tariffs are regarded as the primary risk for economic expansion, nearly two-thirds of the respondents said that their impact on inflation is currently lower than expected. However, most people believe that this is because "the impact has not yet fully emerged" and "businesses have not fully passed on costs." Long-term risks still require vigilance.

The prosperity of the stock market is a double-edged sword that needs to be protected by interest rate cuts

In terms of the stock market, nearly 80% of the respondents believe that artificial intelligence-related stocks are overvalued, with the average valuation premium exceeding 20%. Therefore, the stock market is expected to remain stable at the end of this year At the current level, it will only rise slightly by 5% next year. The cumulative risk of the stock index may also be one of the reasons why the Federal Reserve chooses to cut interest rates preventively. If an excessive cumulative increase encounters a tightening monetary policy, a capital stampede is likely to occur, leading to a recurrence of the 2008 crisis.

Due to the U.S. 401K plan, the quality of the stock market directly affects the consumption tendencies of individuals and www.xm-forex.companies. When the stock market is raging, interest rate cuts are likely not to accelerate the index. Instead, they may prompt funds that are afraid of highs to leave the market. At the same time, maintaining a loose objective monetary environment allows the stock market to adjust healthily at a high level and wait for www.xm-forex.company earnings to improve.

Summary:

Missing data will affect the Fed’s interest rate decisionHowever, many market economists are still betting on the Federal Reserve to cut interest rates. The consideration behind it is definitely not just economic data, but the www.xm-forex.combined efforts of various angles.

At the same time, if an interest rate cut occurs, the U.S. dollar index may open up downward space, and liquidity will also be injected into the world, allowing the economies of other countries in the world to gain breathing space.

However, although the market has clear expectations for the path of interest rate cuts in the future, the Fed's internal policy considerations are still full of variables. Powell emphasized that data before the shutdown showed that the economy "may be on a more solid track than expected," echoing the judgment of some officials on the resilience of the economy.

Judging from the minutes of the September meeting, there were already significant differences within the Fed. At that time, 11 of the 12 voting www.xm-forex.committee members supported a 50 basis point interest rate cut. However, many participants raised objections to the sharp interest rate cut during the discussion and believed that a gradual adjustment of 25 basis points should be adopted.

Based on current economic signals, most analysts believe that subsequent interest rate cuts will return to the normal range.

For the Federal Reserve, under the attack of missing data and multiple risks, every interest rate adjustment is like walking on a balance beam. Powell's statement that "the risk-free path does not exist" is not only honest about the current policy dilemma, but also indicates that in the future, the Federal Reserve will continue to find the most suitable direction between closely tracking economic data, listening to market voices, and adhering to the original intention of policy.

For the market and the public, the waiting and gambling in this interest rate cut process will continue to affect all aspects of economic life.

The above content is all about "[XM Foreign Exchange Official Website]: The Federal Reserve does not need data to cut interest rates? The surprising truth behind the consensus". It was carefully www.xm-forex.compiled and edited by the editor of XM Foreign Exchange. I hope it will be helpful to your trading! Thanks for the support!

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