Fed Poised for December Rate Cut Amid Inflation Concerns and Job Market Resilience
Recent economic data, including stubborn inflation and a job market rebound, hasn’t deterred market expectations for a Federal Reserve rate cut in December. Financial markets are pricing an 85% chance of a 0.25% reduction in the central bank's benchmark federal funds rate, according to CME Group's FedWatch tool. This would mark the third consecutive rate cut in as many meetings.Balancing Inflation and Employment
Fed officials aim to lower interest rates to stimulate economic growth and avert a spike in unemployment while avoiding the risk of reigniting inflation, which remains above their 2% target. The federal funds rate, which influences borrowing costs across the economy, affects mortgages, credit cards, and consumer spending.
Fed Governor Christopher Waller expressed tentative support for the rate cut, citing concerns about inflation's persistent elevation. Meanwhile, the job market report on Friday highlighted economic resilience, with job additions rebounding after storm-related disruptions, reducing immediate unemployment concerns.
The Market's Influence on Fed Decisions
Some analysts suggest the Fed may be swayed by market expectations to avoid surprising investors. Economists Conrad DeQuadros and Jon Ryding of Brean Capital Markets noted that financial markets essentially shape the Fed's policy decisions. "If futures markets indicate a high probability of a rate cut, the Fed is likely to proceed," they explained.
Others argue the labor market's slowing momentum justifies further easing. While the U.S. added an average of 207,000 jobs per month in the first half of 2023, that figure has fallen to 148,000 since July, even when accounting for anomalies like hurricane disruptions in October.
A "Green Light" for Easing
Samuel Tombs, chief economist at Pantheon Macroeconomics, pointed to the recent labor market slowdown as sufficient justification for another rate cut. "November’s labor market data give the FOMC the green light to ease policy again this month," he stated.
The Fed’s dual mandate of controlling inflation and maintaining employment stability remains at the forefront as policymakers weigh the complex dynamics shaping their December decision.
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