Consensus calls for a Fed rate cut next week, but maybe it won’t be that fast

Interest rates are a big deal – a big deal for the economy, a big deal for financial markets and a big deal for all of us personally. 

The general investor consensus now calls for rates to decline. However, this Friday’s jobs report could be the key event for that. 

Domestically and globally, lower rates generally stimulate the economy, thereby lending support to the stock market. Expectations for rate decreases have played a major role in the stock market’s surge this year. Falling rates also mean lower payments if you have mortgage, auto, credit-card or bank loans. To be sure, lower rates can stoke inflation as well. Higher rates, of course, do the opposite in all these areas.

In September, the Fed slashed rates by 50 basis points in its first decrease since 2020. After this move, the investment community agreed a series of reductions would likely follow. Fed officials themselves predicted they would trim rates by another 50 basis points by year-end.

But then came the September employment report. Non-farm payrolls rose 254,000 in the month, a six-month high. The unemployment rate dipped to 4.1% from 4.2% in August. And average hourly wages climbed 4% year-on-year, up from 3.9% in August.

Those numbers show unexpected resilience for the economy. It grew an annualized 2.8% in the third quarter. Meanwhile, the wage data would appear to indicate that inflation isn’t dead. This suggests that perhaps the Fed doesn’t need to keep cutting rates, at least for now.

But many investors remain convinced the central bank will lower rates at its Nov. 6-7 meeting. Interest-rate futures point to a 97% probability that the Fed cuts 25 basis points in the meeting and just a 3% chance that it will hold.

Some experts think Fed may stand pat

However, several financial luminaries see a good chance the Fed will stay on the sidelines. 

That includes Torsten Slok, chief economist of private equity giant Apollo Global Management, and Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management.

The Fed’s decision could be determined by Friday’s jobs data for October. Recall that the Fed has a dual mandate to minimize inflation and maximize employment.

Recent hurricanes and a strike by Boeing workers this month have thrown great uncertainty into forecasts for the jobs numbers. Economists surveyed by Bloomberg expect anything from a 10,000 decline to a 180,000 increase in October payrolls. They anticipate the unemployment rate will remain at 4.1%.

If the Fed views the numbers as clearly strong, it will likely refrain from cutting rates. If it views them as clearly weak, it likely will cut. In light of the complications in the statistics, it’s difficult to know what numbers would be “clearly strong” or “clearly weak.”

Normally, a payroll gain of 250,000 or more might be considered clearly strong and one of 120,000 or less might be considered clearly weak.

The crystal ball is cloudy. But keep in mind there’s a good chance the Fed’s rate decision next week will be based on this week’s jobs report. The Fed, of course, has its own job and will keep us all watching what it does.