Will the Federal Reserve cut rates in December? This week's non-farm data is crucial
Citigroup believes that the Federal Reserve is currently "downplaying" the interpretation of the October employment data due to the impact of strikes and hurricanes. In this context, Friday's non-farm payrolls are not only crucial for the Fed's decisions on interest rate cuts in December and January, but also very important for the path of the long-term neutral interest rate. If Friday's non-farm payrolls are weak and November inflation weakens, there is a possibility of a 50 basis point rate cut by the Fed in December; conversely, it may pause rate cuts
Citi stated that Friday's non-farm payroll report will be crucial for the Federal Reserve's recent policies and future direction. If the employment data is strong and inflation strengthens in November, the Fed may pause interest rate hikes at the December FOMC meeting; conversely, there is a possibility of a 50 basis point rate cut.
Citi analyst Andrew Hollenhorst noted in a report on December 2 that according to Powell's latest views, the U.S. labor market has not stabilized and is still softening. This means that the current policy rate is restrictive, and the labor market will not be a source of inflationary pressure. This sharply contrasts with the current market view, where investors believe the U.S. economy is still overheating, limiting the Fed's room to cut rates.
Given the drag from strikes and hurricanes, both the market and the Fed are currently reluctant to overinterpret the weak October employment data. In this context, Friday's employment report is not only crucial for whether the Fed will cut rates in December and January but also for the path of the long-term neutral rate.
Citi currently expects the November non-farm payroll report to be relatively weak, with only 155,000 new jobs added (despite a rebound after the hurricanes and strikes). This implies a potential employment growth of only 84,000, below any estimated growth rate needed to prevent an increase in the unemployment rate. The unemployment rate is expected to rise to 4.3%, highlighting a trend towards a looser labor market.
Citi stated that for the December FOMC meeting, the mainstream market view is currently mainly divided between a 25 basis point rate cut and a "pause" in rate cuts. However, the threshold for pausing rate cuts is high, requiring new jobs in November to exceed 300,000 and November core inflation to significantly exceed expectations (for example, a month-on-month core CPI of 0.4%).
Analysts believe that if the November employment data is weak, combined with a weakening core personal consumption expenditures (PCE) inflation this month (month-on-month below 0.2%), the Fed is expected to cut rates by 50 basis points at this month's FOMC meeting