A positive September jobs report and significant upward revisions to GDP and FDI suggest that a 50 basis point (bp) interest rate cut by the Federal Reserve in September is "unwarranted," according to strategists from Bank of America.
BofA noted that discussions with clients have now shifted from debating whether the Fed will cut 25bp or 50bp in November to the question of whether or not a rate cut is needed at all. In fact, some have speculated that the Fed may not implement a rate cut in November to offset the larger-than-expected reduction in September.
However, the bank's strategist believes that even if the Fed later finds the rate cut in September excessive, it is unlikely that the Fed will be deterred from cutting 25bp in November, especially with strong jobs data.
"Governor Waller said the same thing in his latest comments. As long as the Fed feels confident that a broad-based decline in inflation is on track, they can continue to cut rates to neutral," strategists said in a note on Tuesday.
Although the labor market has recently overcome inflation concerns, attention is now back on the Consumer Price Index (CPI) ahead of the release of data on Thursday. BofA expects a core CPI reading of 0.3% month-on-month, higher than consensus, but believes that the core Personal Consumption Expenditure (PCE) Index will post a softer rate of 0.2%.
The bank noted that this reading should be soft enough for the Fed to continue its 25bp tapering in November, as year-over-year rates will come down due to a favorable base effect, and that Chairman Powell has gotten some slack by "de-emphasizing housing inflation," according to experts. the strategy.
In recent weeks, the term "reliance on data points" by economist and former CEO of PIMCO, Mohamed El-Erian, has attracted the attention of markets that are increasingly sensitive to the release of macroeconomic data.
BofA strategists agreed, saying that while it's natural for the Fed to rely on data, not all data shocks are equally important.
Nevertheless, the Fed's focus on not lagging behind in managing inflation has "made the market react to data shocks. And that probably won't change anytime soon," said the strategist.
