The likelihood of an interest rate cut by the Federal Reserve in December has surged, following indications from officials that they may consider another reduction. This shift comes despite ongoing concerns about inflation and a backlog of economic data that reflect a struggling economy. Key officials have expressed support for a rate cut, particularly as the job market appears to have stalled.
Recent data, delayed from September, revealed that the unemployment rate has risen to 4.4%. This increase occurred even as businesses managed to add 119,000 jobs before the recent government shutdown. With the Fed’s upcoming December meeting approaching, officials will not have the benefit of October hiring or inflation figures to inform their decisions.
Consumer spending figures released this week also fell short of expectations. This suggests that American households may be becoming more cautious, potentially limiting economic growth. Economists point out that spending trends are increasingly reliant on high-income households, while lower- and middle-class families are more reserved in their expenditures, raising concerns about the overall health of the U.S. economy.
Lydia Boussour, Senior Economist at EY-Parthenon, remarked, “Today’s mixed retail sales figures, combined with fresh evidence of soft private-sector hiring, strengthen the case for another cut before year-end. While a December pause had seemed likely, the prospect of a rate cut now looms large.”
As a result, investors have heightened their expectations for a December rate cut. The chances of a 0.25% rate cut have climbed to over 80%, a significant jump from below 40% just a week prior. This change reflects the growing optimism among traders that the Federal Reserve will take action in response to the mixed economic signals.
If implemented, another cut would lower the federal funds rate to a range of 3.5% to 3.75%, marking three consecutive meetings with a reduction. However, there remains a debate among officials regarding the appropriate level for the rate to stimulate growth without being overly restrictive. Some officials, such as New York Fed President John Williams, argue that the current rate is still somewhat restrictive and emphasize the need for adjustments to steer policy closer to a neutral stance.
In a speech last Friday, Williams highlighted the risks of further deterioration in the labor market. He stated, “I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions. Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate.”
Similarly, Fed Governor Christopher Waller has voiced his support for a rate cut, emphasizing that the employment situation has not improved sufficiently. He conveyed his apprehensions regarding labor market conditions, stating, “My concern is mainly labor market, in terms of our dual mandate. So I’m advocating for a rate cut at the next meeting.”
Meanwhile, San Francisco Fed President Mary Daly, who does not have a vote on rate decisions this year, recently shifted her stance to support a December cut. She expressed her concern over the vulnerability of the labor market, indicating that the risks could lead to significant changes.
Despite this consensus among some officials, there is still a notable divide within the Fed regarding the future path of monetary policy. Boston Fed President Susan Collins, who supported the October rate cut, expressed hesitance about further reductions, citing a lack of urgency in the current economic environment. “Overall financial conditions are a bit of a tailwind, not a headwind,” Collins noted, reinforcing the complexities the Fed faces as it navigates mixed economic signals.
The Federal Reserve is grappling with the challenge of balancing the need for economic stimulus against persistent inflation, which has exceeded its 2% target for an extended period. Officials continue to evaluate the impact of factors such as tariffs and rising costs on consumer prices.
As the December meeting approaches, the Fed is likely to rely on more comprehensive data releases to guide its decision-making. The mixed messages from the economy could lead to a challenging discussion for Fed Chair Jerome Powell, particularly as he faces pressure from various quarters to maintain an accommodative monetary policy.
In this complex environment, the Federal Reserve must carefully consider its next steps, balancing the risk of stagflation—where economic growth stalls while inflation remains elevated—against the need to support a fragile labor market.
