After a significant half percentage point rate reduction in September, the Federal Reserve is anticipated to make a more cautious quarter-point cut this Thursday and possibly several more next year as inflation shows signs of diminishing.

However, if the Fed alters its approach, it is expected to decrease rates more slowly to ensure inflation trends downwards, according to economists.

This goes against some experts’ predictions that the central bank has largely conquered rising prices and needs to promptly cut interest rates to secure a “soft landing” that prevents a recession.

“It seems more likely that we will see a pause (in December) instead of a substantial half-point cut,” remarked Barclays economist Marc Giannoni, who suggests a more balanced strategy – a quarter point cut this week followed by another in December.

The stock market has reacted positively to the idea of consistent rate cuts, but a pause might cause volatility in equities.

Impact of Rising Interest Rates on Inflation

In 2022 and 2023, the Fed raised its benchmark rate to a peak of 5.25% to 5.5% to combat inflation resulting from the pandemic, before making its first rate cut in four years during September.

The Fed increases rates to deter borrowing and slow economic activity in order to reduce inflation. Conversely, it lowers rates to boost employment and stimulate a sluggish economy.

What Causes Economic Slowdown?

As the two-day meeting wraps up Thursday, economists do not anticipate Fed Chair Jerome Powell to indicate when or how fast the Fed will cut rates; instead, he is expected to say that the Fed’s future actions will be based on how the economy and inflation unfold. Factors such as a market downturn affecting consumer spending, rising bankruptcies among struggling small businesses, or concerns about federal policy shifts post-election may affect the job market, according to economists.

Last week’s disappointing October jobs report raised concerns about whether the central bank might need to reduce rates again by half a point to support a labor market that may be cooling faster than anticipated.

Despite predictions that two hurricanes in the Southeast and a strike by Boeing workers would dampen job numbers, only 12,000 jobs were added last month – well below the expected 105,000. Additionally, job growth for August and September was revised down by a hefty 112,000 positions.

In a letter sent Friday to Powell, Senators Elizabeth Warren, D-Mass., and John Hickenlooper, D-Colo., called on Fed officials to cut rates by half a point on Thursday.

“While the economy stays strong, the Fed’s tight monetary policy may be diminishing the demand for workers,” they stated, pointing to the growing number of Americans filing for unemployment benefits.

Yet, Giannoni and other economists believe that it is difficult for Fed officials to determine how much the storms and strike affected employment figures. Consequently, he suggests they might attribute the dismal data to one-off incidents.

Current State of the Job Market

Even with the significant downward revisions for job gains in the previous two months, Giannoni pointed out that job growth averaged a solid 148,000 from July to September. This is a decrease from an average of 267,000 in the first three months of the year. However, after the pandemic’s aftereffects and the Fed’s unprecedented rate hikes to combat inflation, a slowdown in job creation was expected.

“The economy has been resilient,” stated Ryan Sweet, chief U.S. economist at Oxford Economics.

The unemployment rate, which measures whether people have a job rather than their week-to-week attendance, remained stable at 4.1% last month. This indicates the jobless rate is likely to finish the year below the Fed’s earlier prediction of 4.4%, showing that the labor market remains strong.

Moreover, a recent report indicated that the economy expanded at a healthy annualized rate of 2.8% in the third quarter, driven by a robust 3.7% increase in consumer spending.

Is Inflation Dropping in 2024?

Inflation is declining, but not as quickly as hoped. The Fed’s preferred annual inflation measure fell to 2.1% last month, just above its 2% target. However, a core inflation metric that excludes unpredictable food and energy costs – which the Fed more closely observes – remained steady at 2.7% and is likely to end the year exceeding the 2.6% projection set by Fed officials.

Service costs, including healthcare and car repairs, continued to rise primarily due to significant wage increases passed on to consumers by companies.

This leads to the conclusion that the Fed may still have to be more concerned about a potential resurgence of inflation than a struggling job market. “It’s not guaranteed that inflation will drop to 2%,” stated Giannoni.

Influence of Immigration on Inflation

In recent years, an increase in immigration has expanded the labor market and moderated wage growth, but this trend has started to reverse after the White House implemented restrictions on southern border crossings in June. Barclays projects that by the end of 2025, core inflation will stand at 2.3%, still above the Fed’s target of 2%.

As a result, Giannoni anticipates the Fed to reduce its key rate to a range of 3.5% to 3.75% next year, exceeding the target of 3.25% to The 3.5% rate anticipated by Federal Reserve officials in September may not be a final destination. Futures markets are anticipating a similar path for interest rates.

Goldman Sachs economist David Mericle expresses skepticism about the Fed pausing its rate cuts in December. He points out that the Fed aims to stabilize a labor market that has shown some instability recently. Additionally, he notes that some Fed members have remarked that high interest rates are creating constraints on the economy, and a slow reduction may lead to detrimental effects on economic activity and job availability.

Mericle predicts that the Fed will lower rates at four consecutive meetings in the first half of 2025, bringing them down to a range between 3.25% and 3.5%. However, he cautions that a robust job market might lead officials to opt for rate reductions every other meeting instead.

“There’s a chance they might opt for fewer rate cuts next year,” Sweet commented.

This article has been updated to correct an earlier mistake.