Federal Reserve's Interest Rate Meeting Commences
On October 28 local time, the Federal Reserve's two-day interest rate meeting officially began in Washington. It is widely predicted that the Federal Open Market Committee (FOMC) will cut interest rates by another 25 basis points. This would be the third rate cut by the Fed this year, and the market is keenly focused on whether Powell will hint at a path for further easing in the future.
The Trump administration has repeatedly pressured for lower rates, putting Powell under political pressure, and there is division among internal officials about the pace and endpoint of rate cuts. Some officials are concerned about the risk of high inflation and advocate caution, while others believe that the weak labor market requires stronger stimulus.
Data Gap Puts Decision Making in an "Information Fog"
Currently, the US government shutdown has entered its fourth week, and multiple economic data points have yet to be released. The Fed faces unprecedented difficulty in making rate decisions without data support. The latest data indicate that inflation remains above the 2% target level, and businesses generally expect prices to continue rising. Meanwhile, slowing job growth and weakening consumer confidence present policymakers with a dilemma.
Tariffs remain an important variable for inflation. The Personal Consumption Expenditures Price Index (PCE) rose from 2.3% in April to 2.7% in August. If households and businesses develop an "adaptive mindset" to high inflation, it will complicate inflation management. Powell recently took a softer stance, stating that the tariff impact on inflation might be just a "one-time shock."
However, Federal Reserve Governor Barr warned that trade policy might keep inflation high, predicting core PCE to exceed 3% by year-end, and emphasized that it might take two years for prices to fall back to target levels.
Expectations of Rate Cuts Heat Up, Market Positions in Advance
Analysts believe a rate cut at this meeting is almost a foregone conclusion. Futures markets show over a 90% probability of consecutive rate cuts in the Fed's next two meetings, with 2 to 3 more cuts possible next year. Kansas City Fed President Schmidt favors maintaining current rates, worrying about excessive easing, while San Francisco Fed President Daly stated that rate cuts are a "risk management" measure that helps balance inflation and employment.
Nomura Securities Economist David Saif commented, "With the government shutdown, the actual state of the labor market is a mystery, and the Fed is almost making 'blind decisions.'
Despite the absence of non-farm data, unofficial data suggest consumer and retail spending remains resilient. Bob Schwartz of Oxford Economics stated that if the shutdown continues, interruptions in government employee salaries will drag down fourth-quarter consumption, impacting GDP by about 0.4%.
End of Balance Sheet Reduction May Be Near
Aside from rate decisions, the market is also focusing on whether the Fed will officially announce the end of quantitative tightening (QT). Powell hinted earlier this month that balance sheet reduction might terminate in the "coming months." Currently, the Fed's balance sheet size is about $6.6 trillion, having shrunk by nearly one-third from its peak. If bank system reserves continue to decline, liquidity shortages might force the Fed to stop sooner.
Several institutions expect that the October meeting will be a turning point in the balance sheet reduction cycle. ICAP sees recent repo market fluctuations as a "warning signal," suggesting the Fed might initiate a liquidity restoration phase. Jefferies forecasts the Fed will completely stop quantitative tightening at this meeting but may continue allowing some mortgage-backed securities to mature naturally.
Powell May Maintain Policy Flexibility
Deutsche Bank predicts Powell will not make a clear commitment to continue rate cuts in December but will keep options open. If government data resume and the job market improves, the Fed may adjust the rate cut pace. Overall, the Fed's focus is gradually shifting from inflation control to economic stability. Policymakers need to find a new balance between preventing an inflation rebound and avoiding excessive economic slowdown.
As market expectations stabilize, investors generally believe this meeting could become a key turning point in the Fed's shift from tight to accommodative monetary policy.
