The Federal Reserve’s pivotal week is upon us once more.
As is often remarked in financial circles, this week’s FOMC meeting carries significant weight, setting the stage for near-term policy. The clock is ticking down on the tenure of Federal Reserve Chair Jerome Powell, whose term is scheduled to conclude in May 2026. However, his influence remains paramount for the moment. Expectations point towards a 25 basis point reduction in the federal funds rate following the conclusion of Wednesday’s FOMC gathering. Furthermore, there is speculation that the meeting may offer clues regarding an impending expansion of the Fed’s balance sheet, a policy change not seen in over three years.
The Federal Reserve faces a unique challenge in its deliberations this week, operating with a noticeable delay in key economic indicators.
The government shutdown between October and November resulted in a significant lag in the release of crucial economic data. Specifically, the most recent labor market and inflation figures available to the FOMC members date back to September. Despite this incomplete picture, the latest data points we do possess for essential metrics indicate that the Core Consumer Price Index (CPI) remains elevated. Currently, the core CPI stands at 2.4% year-over-year, exceeding the Fed’s stated 2% target, and has shown an upward trend since April.
The ongoing inflation challenge is a sticking point that will worry policymakers considering a rate cut.
On the employment front, the slowdown in non-farm payrolls that occurred over the summer has been reversed. The September report showed a strong rebound, adding 119,000 jobs, which was a clear beat against market expectations. Typically I do find this measure can be very lagging, which often results in very large negative revisions, which we have seen a lot this year. My preference would be to look at the ADP private jobs data. I find this a much more current and reliable measure. It can also be far less influenced by government job creation and metric massaging.
The bad news here is that, things don’t look nearly as rosey. There was -32k jobs reported in November.
This also does line up with the headline unemployment data, which as been creeping up. This up trend is a pattern that has previously cropped up and been a leading indicator for recessions, so the fed will be very wary of this data.
So whilst things aren’t awful in the data, its going to be a tug of war between the Fed members worried about inflation rising, and the ones that would prefer to support the labour market from further weakness.
We do know there has been a fairly even split as of late so it will be interesting to see how this plays out going forward.
For today, markets are confident a cut is on the table and I’m inclined to agree. More importantly though, I’m very keen to find out what their plans are for the balance sheet going forward.
One undeniable reality is that the Federal Reserve is not monolithic. In fact, the current level of internal division may be unparalleled in recent memory.
A number of the 12 voting members on the FOMC have recently signaled anxiety over inflation, indicating they may not support an interest rate cut this week. Historically, the Fed was known as a highly unified central bank, and explicit dissents from policy decisions were almost unheard of. This week, however, market observers should be prepared for the possibility of three or more dissenting votes.
I really do think liquidity via the balance sheet expansion is the more important news right now, given the tightness repo markets recently experienced so I’ll be locked into anything they say about that.
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