Regardless of the non-farm payrolls and PCE data, will the Federal Reserve cut interest rates?

The Federal Reserve will cut interest rates again or stand pat? These two choices seem to be the options that Federal Reserve policymakers put on the table at the November meeting, and this week's two reports on inflation and the labor market may sway the final decision.

Wil Stith, bond portfolio manager at Wilmington Trust, said, "If Thursday's inflation data comes in stronger than expected, and Friday's non-farm data is hotter than expected," " I think they can discuss pausing the rate cuts because they have already cut rates by 50 basis points before."

Jeffrey Roach, Chief Economist at LPL Financial, also believes that "strong job growth may convince the Federal Reserve to pause rate cuts in November."

However, other observers of the Federal Reserve suggest that the data to be released on Thursday and Friday is unlikely to alter the Fed's rate-cutting path.

Jamie Cox, Managing Partner at Harris Financial Group, said, "Regardless of what the data says, the Federal Reserve is already on the path of cutting rates by 25 basis points in November, and the central bank is unlikely to change that trajectory."

Ellen Zentner, Chief Economic Strategist at Morgan Stanley Wealth Management, said, "There is no reason to believe that the Federal Reserve will not cut rates by another 25 basis points in November," unless there is a major surprise in the jobs report.

Currently, many traders agree with this assessment. As of last Friday, investors expected a probability of over 90% that the Federal Reserve will cut rates by 25 basis points at the November meeting.

Data that is difficult to interpret

It is certain that all Federal Reserve policymakers will closely monitor the reports released this week.

First, on Thursday, the latest data on Personal Consumption Expenditures (PCE) will be released, which is the Fed's preferred inflation gauge.

The market expects the year-on-year growth rate of core PCE (excluding volatile food and energy prices) to decrease from 2.7% to 2.6%. The Fed's target is to gradually bring this indicator down to 2%.

Another inflation reading, the Consumer Price Index (CPI), exceeded expectations in September. This provided new arguments for Fed officials advocating for gradual rate cuts after the significant cut in September.

The second key report this week will be the non-farm data released on Friday.

This report may not provide a clear assessment for officials as it may be disrupted by two major hurricanes, which led to temporary unemployment in affected areas, and the data is also affected by the strike of Boeing workers.

Economists expect the addition of new jobs in October to be recorded at 123,000, lower than September's 254,000. The unemployment rate is expected to remain unchanged at 4.1%.

Fed Governor Waller said on October 14, "Unfortunately, interpreting the October employment report is not easy." Waller added, "This report is likely to show significant job losses in temporary positions due to the recent two hurricanes and strikes by Boeing employees." He expects that the hurricanes may result in over 100,000 fewer new jobs than before the disasters.

The latest release of the Fed Beige Book indicates a modest cooling in the job market, while maintaining stability.

Layoffs are limited, with a slight increase in employment. More than half of the regional Fed reports noted mild to moderate growth, but hiring is mainly focused on filling vacant positions rather than creating new ones. Wage growth has also slowed down.

"Gradual" and "Moderate" Rate Cuts

Waller is one of the Fed officials in recent weeks advocating for a "gradual" approach to rate cuts, as some new evidence they have received suggests that inflation and the job market remain hot.

Minneapolis Fed President Kashkari stated that he is considering implementing "moderate" rate cuts over the next few quarters, while Kansas City Fed President Schmidt pointed out that his preference is to "avoid significant moves."

Dallas Fed President Kaplan mentioned that given the increased risks of deterioration in the job market and the danger of inflation picking up again, rates will be lowered "gradually."

Fed policymakers in September's median estimate projected two more 25-basis-point rate cuts in the remaining two meetings this year.

Atlanta Fed President Bostic is one of those considering keeping rates unchanged at the next meeting.

While hawkish members hinted at a pause in rate cuts, EY's Chief Economist Gregory Daco cited Fed Chair Powell's guidance as the reason he believes the Fed will stick to two more 25-basis-point rate cuts at the remaining two policy meetings this year.

Daco stated in a release, "Powell emphasized that policy gradualism will dominate through the end of the year."