Federal Reserve set for another interest-rate cut despite economic data blackout

• The US Federal Reserve is expected to cut the policy rate after the October meeting. 
• The statement language and Fed Chair Powell’s comments will be key in the absence of economic data releases.
• The US Dollar faces a two-way risk amid potential changes to market pricing of the rate outlook.

The United States (US) Federal Reserve (Fed) will announce its interest rate decision and publish the Monetary Policy Statement following the October policy meeting on Wednesday. 

Market participants widely anticipate the US central bank to cut the policy rate by 25 basis points (bps), lowering it to the range of 3.75%-4%.

The CME FedWatch Tool shows that investors are fully pricing in the 25 bps reduction in October and see about a 95% probability of one more 25 bps cut at the last policy meeting of the year in December.  

The revised Summary of Economic Projections (SEP), published in September by the Fed, showed that policymakers’ projections implied two more 25 bps cuts in 2025, followed by 25 bps reductions in both 2026 and 2027.

According to a recently-conducted Reuters poll, 115 of 117 economists have predicted that the Fed will opt for a 25 bps cut in October, while 83 of them saw one more 25 bps cut in December. Moreover, 25 of 33 economists noted that the bigger risk to the Fed rate policy by the end of this cycle is that it would set rates too low.

The Fed’s meeting will take place under unusual circumstances. The federal government entered a shutdown on October 1 after Congress failed to pass new funding legislation. As a result, several key macroeconomic data releases that the Fed assesses when setting its monetary policy have been suspended, including the monthly September employment report and multiple weekly Initial Jobless Claims data. The Consumer Price Index (CPI) data for September, originally scheduled to be published on October 15, was released with a delay on October 24. The report showed that the CPI and the core CPI rose by 0.3% and 0.2%, respectively. Both of these prints came in softer than analysts’ estimates.

TD Securities analysts agree that the US central bank will likely continue recalibrating policy closer to neutral, implementing another 25 bps cut. “Despite mounting uncertainty amid the lack of data releases, we still expect the Committee’s guidance to tilt dovish. Chair Powell will likely continue walking a fine line when flagging signs of labor market weakness. The risk of persistent inflation remains a risk,” they add. 

Fed Chair Powell recently indicated that they could be nearing the end of the quantitative tightening (QT) and stop reducing the size of the central bank’s bond holdings. The Fed could either officially announce that it will stop the balance sheet runoff or provide a future date. Deutsche Bank analysts argue Fed Chair Powell will focus on the balance sheet policy and the policy framework review in the press conference. “On QT, our team expects the Fed to announce an end to the programme today, with the run-off concluding next month,” they note.