The Fed wraps up its last meeting of the year this week, and investors think they already know the play. Odds in futures markets put the chance of another rate cut at about 90 percent.
The logic is simple. The job market has softened, growth risks are rising, and borrowing costs are still sitting at levels that feel too tight for an economy that is clearly losing steam. Inflation is running hotter than the Fed’s target, and policymakers don’t see the outlook exactly the same way, but most agree the bigger danger is holding rates too high for too long.
The problem is the data has been messy. The government shutdown scrambled several key reports, leaving a lot more uncertainty than usual. Some Fed members think the economy is sliding into a legitimate slowdown. Others believe things are cooling but not collapsing. That group has been warning that cutting rates again could reignite inflation. With that split still unresolved, there is still a path where the Fed simply holds steady.
The larger question is what happens after this meeting. The Fed is dealing with one of its widest internal disagreements in years over the “neutral rate,” the level where rates neither stimulate nor restrain the economy. Policymakers’ estimates now span the broadest range in more than a decade. That matters because the current rate is already near the top of some of those estimates, making each additional cut a tougher debate.
There is another storyline developing beneath the surface: liquidity. The Fed just finished shrinking its balance sheet, and money markets are starting to feel tighter. To prevent strains, the Fed is likely to begin “reserve management purchases,” or small buybacks of ultra-short Treasury bills to keep the plumbing running smoothly. It is not stimulus and it is not QE. It is closer to routine maintenance. But if it suddenly becomes the headline, now you know why.
We’re also heading into a pretty light week for economic data, with the NFIB small business optimism index and the delayed October JOLTS report landing Tuesday, the monthly US federal budget and delayed Q3 employment cost index coming Wednesday, and the usual initial jobless claims report on Thursday.
All of this is just the warm-up act for the main event: The FOMC begins its two-day meeting on Tuesday and will announce its interest rate decision Wednesday.
Earnings are slowing down as we inch toward the holidays:
Monday: Toll Brothers
Tuesday: Campbell’s Co., AutoZone, GameStop, AeroVironment, Ollie’s Bargain Outlet
Wednesday: Oracle, Adobe, Synopsys, Chewy, Vail Resorts
Thursday: Broadcom, Costco, Lululemon, Manchester United