A Glidepath

The Federal Reserve Open Market Committee (FOMC) reduced its target for interest rates by 0.25% to a range of 4.50 – 4.75%, the second cut of the current cycle. While any two points make a straight line, the November action seems to set a glidepath for at least the middle phase of this rate-cut cycle. We think the quick start (Sept), steady midpoint (Nov, Dec, and maybe Jan), and shallow finish (Mar, Jun) form a good base case of what this midcycle adjustment will look like. That base case assumes little to no economic downturn in 2025, which, with fiscal policy very much in flux right now, is a pretty big assumption.

Data since the FOMC meeting in September has been extremely noisy. Nowhere is the noise more obvious than in the labor markets. Just two weeks after the Fed’s super-sized Sept. cut, job gains went through the roof. And just four weeks after that, job gains crashed through the floorboards. The reality probably lies somewhere in the middle, but for the moment, the only logical approach is to take some sort of average across these noisy releases. That average suggests decent, if slightly slower, job gains. Other measures of economic growth are meanwhile buoyant, with consumer spending and business investment both proceeding healthily. We are anticipating a spurt of economic activity in the wake of the 2024 election as well—not because of the outcome, but rather because the paralytic uncertainty leading up to the election will ease. When it comes to inflation, the recent data are mixed, though to a lesser degree than the jobs data. Core PCE inflation is running at a +2.3% 3-month annualized pace after a slight increase in September. That result is a touch warmer than the Fed prefers, but well down from the early 2024 pace. Just as importantly, inflation volatility is falling, which should increase confidence that price levels are indeed holding close to the 2% target.

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