The Federal Reserve is widely deliver another rate cut at its upcoming November meeting.

This comes as inflation shows signs of cooling, edging closer to the Fed’s 2% target, and wage pressures begin to ease. The move is aimed at preventing the labor market from losing further steam, a key concern for the Fed as it tries to orchestrate a “soft landing” for the economy.

Recent economic data paints a somewhat mixed picture, supporting the case for a rate cut while also raising some eyebrows about the long-term inflation outlook. Let’s break it down:

The Good News

• Inflation is Cooling: The Personal Consumption Expenditures (PCE) price index, the Fed’s favored inflation gauge, dipped to 2.1% in September, down from 2.3% in August. This brings inflation tantalizingly close to the Fed’s 2% target.
• Wage Pressures are Easing: The Employment Cost Index, a broad measure of wage growth, rose by a mere 0.8% in the third quarter, the smallest increase since the second quarter of 2021. This suggests that the fear of a wage-price spiral, where rising wages fuel further inflation, may be subsiding.

These positive developments have fueled expectations of not one, but two rate cuts in the coming months. Futures markets are currently pricing in a 94% chance of a 25-basis-point cut at the November meeting and a 70% chance of another cut in December.

The Not-So-Good News

• Underlying Inflation Remains Sticky: While headline inflation is moderating, core inflation, which excludes volatile food and energy prices, ticked up to 2.7% in September. This suggests that underlying inflationary pressures may be more persistent than previously thought.
• Political Uncertainty Looms: The upcoming November elections add a layer of uncertainty to the economic outlook. Political gridlock or unexpected policy shifts could disrupt the Fed’s carefully laid plans.
• Mixed Signals from the Labor Market: Friday’s employment report is expected to show a slowdown in job growth, but this is likely to be distorted by recent hurricanes and the ongoing Boeing strike. This makes it difficult to get a clear read on the health of the labor market.

The Fed’s Balancing Act

The Fed faces a delicate balancing act. On one hand, it needs to support the labor market and prevent the economy from slipping into recession. On the other hand, it must remain vigilant against a resurgence of inflation.

The current data supports a near-term easing of monetary policy, but the long-term outlook remains murky. The Fed will need to carefully weigh the risks and benefits of further rate cuts, taking into account the evolving economic landscape and the potential for unexpected shocks.

What to Watch For

• The November Employment Report: The November jobs report, due out in early December, will provide a crucial update on the health of the labor market. A strong report could ease concerns about a recession, while a weak report could raise concerns about the need for further stimulus.
• The Fed’s December Meeting: The Fed’s December meeting will be a key event to watch. The central bank will have another opportunity to assess the economic data and adjust its policy stance accordingly.
• Developments in the Inflation Outlook: The Fed will be closely monitoring inflation data in the coming months. Any signs of a resurgence in inflation could prompt the central bank to rethink its easing plans.

The Fed’s path forward is fraught with challenges. The central bank will need to be nimble and adaptable as it navigates the uncertain economic terrain ahead. The decisions it makes in the coming months will have a profound impact on the U.S. economy and the global financial markets.