The Federal Reserve speaks intensively, releasing significant signals.

In the early morning of October 15th Beijing time, one of the most influential officials of the Federal Reserve, Governor Christopher Waller, indicated in his latest speech that the Federal Reserve needs to be "more cautious" about future rate cuts. Waller hinted that the magnitude of future rate cuts will be less than the significant reduction in September. This statement further increased the probability of the Federal Reserve cutting rates by 25 basis points in November.

Neil Kashkari, a 2026 FOMC voter and President of the Minneapolis Federal Reserve, also said in his latest speech that given the 2% inflation target is about to be achieved, the Federal Reserve may further moderately reduce interest rates in the next few quarters.

According to the CME "Federal Reserve Watch", the probability of the Federal Reserve cutting rates by 25 basis points by November is 95.6%, and the probability of keeping rates unchanged is 4.4%; the probability of a cumulative rate cut of 50 basis points by December is 84.1%. This means that futures traders are betting that the Federal Reserve will cut rates by 25 basis points at the meetings in November and December.

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In terms of the market, the three major U.S. stock indexes all closed higher, with the Nasdaq up 0.87%, the S&P 500 up 0.77%, and the Dow up 0.47%. The S&P 500 and Dow both hit new historical highs, and the Nasdaq hit a high not seen in about three months. Most large technology stocks rose, with Nvidia rising by more than 2% to a new historical closing high; Apple and Google rose by more than 1%, while Microsoft, Tesla, and Meta rose slightly. Popular Chinese concept stocks generally fell, with the Nasdaq Golden Dragon China Index falling by 2.09%.

The Federal Reserve speaks with significant weight

In the early morning of October 15th Beijing time, Federal Reserve Governor Waller said in a speech that future rate cuts need to be "more cautious". Waller hinted that the magnitude of future rate cuts will be less than the significant reduction in September.

Waller said at a Stanford University conference, "I believe that the overall data indicates that monetary policy should be more cautious about the speed of rate cuts, rather than rushing forward as it did at the September meeting. No matter what happens in the near term, my basic view remains that policy rates should be gradually reduced next year."

Waller pointed out that the current economic data allows the Federal Reserve to cut rates at an "appropriate pace" until a neutral interest rate is achieved. As long as rates are above the neutral level, it means that the Federal Reserve has a considerable amount of room to cut rates.

Waller said that the U.S. job market has slowed down, but it is still quite healthy, the labor market is basically balanced, the unemployment rate may rise slightly, but it may still remain at a historically low level. However, he expects that due to the impact of hurricanes and strikes, the U.S. may lose 100,000 non-farm jobs in October.Regarding the outlook for U.S. inflation, Waller indicated that the private sector forecasts a rise in the Personal Consumption Expenditures Price Index (PCE) in September, which is an unwelcome phenomenon. Whether this month's inflation data are merely noise or a harbinger of a sustained increase in inflation remains to be seen. The FOMC's inflation target is an average of 2% over the long term, but there are reasons to suggest that future price increases may be moderate.

Waller noted that recently released upward revisions to GDI, an increase in job vacancies, high GDP growth forecasts, strong employment reports, and higher-than-expected CPI reports suggest that the U.S. economy may not be slowing down as expected, with GDP expected to grow more rapidly in the second half of 2024.

Regarding the outlook for subsequent rate cuts, Waller stated, "Regardless of what happens in the near term, my base case is still a gradual reduction in the policy rate next year. The median forecast of FOMC participants is a rate of 3.4% by the end of 2025, so most of my colleagues also anticipate a gradual reduction in policy accommodation next year. As for the ultimate policy target, it remains uncertain."

Waller emphasized that he will closely monitor the inflation, labor market, and economic activity data released before the next meeting to see whether these data confirm or refute his inclination to ease monetary policy.

"Further moderate rate cuts"

On the same day, the 2026 FOMC voter and Minneapolis Fed Chairman, Neel Kashkari, also stated in a speech that given the imminent achievement of the 2% inflation target, the Federal Reserve may further moderately reduce rates in the coming quarters.

Kashkari emphasized that the path of future policy will be driven by actual economic, inflation, and labor market data. Currently, the federal funds rate is between 4.75% and 5%, and this monetary policy stance still restricts growth, but the extent of this restriction is not yet clear.

Kashkari pointed out that the Federal Reserve has made significant progress in inflation control and is in the final stage of bringing inflation down to the 2% target, with substantial evidence indicating that U.S. inflation will further decline. Recent strong employment market data show that the labor market remains robust, with no signs of an imminent rapid slowdown.

Kashkari stated that when weighing the feasibility of further reducing the rate target, the Federal Reserve is considering how much the rate can be lowered in the context of slowing price pressures and a still-strong economy. This indicates that the Federal Reserve will closely monitor changes in economic data when formulating monetary policy to ensure the achievement of the inflation target and a balance with economic growth.

Kashkari previously expressed satisfaction with the Federal Reserve's 50 basis point rate cut in September, stating that a "reasonable starting point" would be for the Federal Reserve to cut rates by a quarter of a percentage point at each of the remaining two meetings this year.Kashkari also mentioned that if the U.S. debt continues to swell, the neutral interest rate will also rise. According to the CME "FedWatch," the probability of the Federal Reserve lowering the interest rate by 25 basis points by November is 95.6%, and the probability of maintaining the current interest rate is 4.4%. By December, the cumulative probability of lowering the interest rate by 25 basis points is 15.4%, by 50 basis points is 84.1%, and by 75 basis points is 0%; the cumulative probability of lowering the interest rate by 100 basis points is 0%. This implies that futures traders are betting that the Federal Reserve will lower the interest rate by 25 basis points at the November and December interest rate meetings.

Goldman Sachs predicted in its latest report that the U.S. Department of Commerce will release the annual rate of the Personal Consumption Expenditure Price Index (PCE) for September later this month, which will record 2.04%. If Goldman Sachs' forecast is correct, then this number will be rounded to 2%, consistent with the Federal Reserve's long-term target. The Federal Reserve prefers to use PCE as its inflation indicator, but it is not the only data it relies on.

Additionally, the Cleveland Fed's "Inflation Nowcast" dashboard also predicts that the overall PCE annual rate for September will record 2.06%, which rounds to 2.1%.