Federal Reserve officials cut interest rates in September for the first time in four years, but now investors are beginning to ask the natural next question: How much will they lower them in the months and years to come?
Deciding the answer could be complicated, and Friday’s job market data did little to clear things up.
Hiring stalled out in October, but that happened as two hurricanes hit the country, most likely substantially affecting job gains in some industries, and as strikes lowered employment numbers in manufacturing. The jobless rate was unchanged at 4.1 percent.
The muddled report leaves officials with little up-to-date idea of how strong hiring conditions are, even as the unemployment figure hinted that the economy is holding steady. Given that, the figures are likely to do little to change the Fed’s immediate policy path. Officials are widely expected to cut rates by a quarter point next week. But the latest data also shed little light on the path ahead for the economy.
“They are going to need more data after this,” said Laura Rosner-Warburton, senior economist at MacroPolicy Perspectives. She added that the Fed was unlikely to make big shifts at its meeting next week in any case, given how much could change in the economy depending on who wins the White House.
“The Fed is going to be heads down here. We’re at a moment of intense uncertainty because of the U.S. election,” she said.
The Fed has two goals. Central bankers are supposed to control inflation and maintain a strong labor market. That means that when inflation is rapid, as it was from 2021 to 2023, officials lift interest rates to slow the economy and wrestle it down. And when inflation cools, as it has been doing recently, policymakers lower interest rates to make sure that they do not cool growth so much that they risk serious damage to hiring conditions.
Because price increases have slowed and unemployment has ticked up over the past year, the Fed lowered interest rates by half a percentage point in September. Officials are widely expected to follow that up with another rate cut at their meeting on Nov. 7.
What happens after that is less certain.
Fed officials have forecast two more quarter-point rate cuts before the end of the year, which would most likely mean one in November and one in December. They have also forecast further rate cuts in 2025. But U.S. growth has been strong in recent months, and consumers are spending at a robust clip. Such resilience could make it tough to decide how much and how quickly to lower interest rates.
Markets are still broadly expecting a December rate cut, but they do not see one as a totally sure bet. And the path after that is up for debate.
While the latest jobs data do little to clear up the picture, Fed officials will look at a variety of other economic measures — including weekly jobless claims, wage data and anecdotal reports — to try to assess the current state of the economy in the weeks ahead.
And as investors try to understand how the Fed is thinking, they are likely to keep a close eye on both the Fed decision next week and a subsequent news conference with Jerome H. Powell, the central bank’s chair.
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