The likelihood of another interest rate cut by the Federal Reserve at its upcoming December meeting has significantly increased, following indications from officials who express openness to further reductions. This shift comes even as concerns about inflation persist and recent economic data reveal a struggling economy.
Recent reports indicate that the job market has shown signs of stagnation. The September employment data, which was delayed, shows an increase in the unemployment rate to 4.4%, despite businesses adding 119,000 jobs prior to the government shutdown. The Fed will lack key figures for October on hiring and inflation before their December meeting, complicating the decision-making process.
Consumer spending figures also fell short of expectations in September, another delayed report revealed. This suggests that American households may be facing challenges in maintaining spending levels due to rising inflation and uncertainties in the labor market. Economists note that spending patterns are increasingly driven by high-income households, while lower- and middle-income families adopt a more cautious approach, potentially impacting the overall economy.
According to Lydia Boussour, Senior Economist at EY-Parthenon, “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.”
Investor sentiment has shifted dramatically in favor of a December rate cut. Following remarks from several Fed officials, futures markets now indicate an over 80% probability of a quarter-point cut, a significant rise from under 40% just a week prior. The CME FedWatch tool reflects this growing expectation, demonstrating how rapidly market sentiment can change in response to economic indicators and official statements.
A potential rate cut in December would lower the federal funds rate to a range of 3.5% to 3.75%, marking three consecutive meetings with reductions. Fed officials are divided on the appropriate level for the rate to cease being restrictive to economic growth. Some, like John Williams, President of the New York Fed, believe that the current rate is still somewhat restrictive, while others argue it may already be neutral.
In a recent speech, Williams expressed concerns about the labor market, stating, “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 to move the stance of policy closer to the range of neutral.”
Another advocate for a December cut, Christopher Waller, a Fed governor, emphasized the need for a reduction due to ongoing labor market challenges. In a Monday interview, he stated, “My concern is mainly labor market, in terms of our dual mandate. So I’m advocating for a rate cut at the next meeting.”
Despite this growing momentum, Fed officials remain divided on the best course of action. Mary Daly, President of the San Francisco Fed, who does not have a vote on rate decisions this year, has shifted her position to support a December reduction, citing vulnerabilities in the labor market.
The ongoing concerns regarding inflation, which has consistently exceeded the Fed’s 2% target, have prompted some officials to tread cautiously. The Fed is attempting to navigate mixed signals from the economy, with fears of stagflation—where economic growth stalls while prices continue to rise—looming in the background.
Boston Fed President Susan Collins, who voted for the rate cut in October, expressed hesitancy about further reductions, stating, “Overall financial conditions are a bit of a tailwind, not a headwind. That’s an environment where, for me, it doesn’t suggest an urgency to be more accommodative in monetary policy.”
As the Federal Reserve prepares for its December meeting, officials are under pressure to balance the need for economic stimulus against the potential risks of high inflation. The dynamic nature of the economic landscape will require careful consideration of upcoming data as they chart the course for monetary policy in the months ahead.
