Fed’s Powell Likely to Dismiss Hawkish Bets: Citi Analysts

Key Takeaways:

• Powell might suggest rate cuts could either slow or accelerate.
• Citi expects Powell to leave options open for dovish policy.
• Upcoming Fed meeting to focus on economic data.
• No expected debate about 25-basis rate cut in November.
• Rate reduction of balance sheet expected to continue into 2025.

Powell Likely to Dismiss Hawkish Votes, Leave Options Open

According to analysts at Citi, Federal Reserve Chair Jerome Powell is likely to suggest that rate cuts can either slow or accelerate, but he is unlikely to endorse hawkish bets for a Federal Reserve pause. This sentiment comes amid recent data showing a softer pace of inflation and slower job gains.

The Fed is expected to deliver a 25 basis point rate cut at the conclusion of its two-day meeting on Thursday. Analysts at Citi believe that recent market bets expecting the U.S. economy not to cool sufficiently have swayed too far. They argue that the latest data points, like the softer-than-expected jobs report and lower than forecast inflation, suggest Powell may not endorse a hawkish view.

Fed officials had already pre-positioned to dismiss any weakness in the October jobs report. Analysts highlighted that the employment cost index slowing to 3.2% annualized also supports this dovish stance.

No Change Expected for November Meeting

Citi analysts expect little debate about cutting rates by 25 basis points at the November meeting. The December rate cut decision, however, will depend on labor market data, and Citi forecasts another 50 basis point cut.

The meeting will be held just after the U.S. presidential and congressional elections. Powell is expected to emphasize that monetary policy will react to macroeconomic developments, not proposed new policies. This approach aims to reassure the public that the Fed’s actions are data-driven, not politically influenced.

Balance Sheet Reduction to Continue

Regarding the balance sheet reduction, Citi analysts are unconcerned by the modest pickup in funding rate volatility. They believe Fed officials could comfortably reduce it well into 2025.

Citi expects Powell to reflect that reserves are "more than ample" and that there are no near-term plans to wind down balance sheet reduction at the upcoming meeting. This indicates a long-term commitment to gradually normalizing monetary policy.

Conclusion

Investors should keep an eye on recent economic data to gauge the Fed’s response. Even though the Fed is expected to deliver a 25 basis point rate cut, Powell’s statement about the balance sheet reduction indicates a cautious but steady approach. The upcoming meeting will provide more clarity on future monetary policy direction.

Stay tuned for updates as the Fed meeting unfolds, and make sure to follow experts like Citi’s Andrew Hollenhorst and Veronica Clark for their insights on the U.S. economy and Federal Reserve policy.