Here’s Why A Divided Fed Is Still Likely To Cut Rates In December

The Federal Reserve remains divided ahead of its December meeting, but this is unlikely to force the central bank to hit the brakes on another rate cut, Standard Chartered says, warning that expected softening in the labor market will continue to steer monetary policy.

"We hold to our view that the FOMC will cut in December, largely because we see a good chance that employment data for September to November will be very soft," Steve Englander, Head, Global G10 FX Research and North America Macro Strategy said in recent note. "This should be enough to push the Fed centrists to the cutting side," he added.

"November labor release will be weak, in our view," he added, noting that "seasonal hiring is likely to be very weak, layoffs unseasonably high," setting a bearish tone on the labor market heading into the meeting.

Dissents against the Fed December policy decision is likely whether the Fed cuts or holds rates amid strong views on either scenario among Fed members in recent commentary.

"If the FOMC cuts in December, there could easily be four dissents. If it stays on hold, there are likely to be three (possibly more) dissents," Englander added.

The deep divide at the Fed is made of those "who want to cut probably want to cut more than 25 basis points, and those who want to hold want to hold for more than one meeting," Standard Chartered said.

The root cause of the divide is not differing economic readings, which are "likely to be resolved by incoming data," Englander said, but rather "different assessments of how policy should respond to above-target inflation and below-target labour outcomes."

The strongest hawkish voices include Jeffrey R. Schmid, President of the Federal Reserve Bank of Kansas City; Susan M. Collins, President of the Federal Reserve Bank of Boston; and Alberto G. Musalem, President of the Federal Reserve Bank of St. Louis. Their desire to "avoid front-loading cuts that might be hard to reverse contrasts with the dovish stance of Governor Stephen Miran, who believes that equilibrium interest rates are lower than commonly believed and disinflationary pressures are stronger, especially from rents," Englander added.

At the December meeting, Standard Chartered believes the Fed doves are likely to prevail as consensus will lean toward delivering "labour-market insurance with another cut," rather than turning attention to inflation, which is far less threatening as unit labour costs - a key source of domestic inflation - are clearly trending downward.

Source: Yahoo Finance