Prospects for U.S. Federal Reserve (Fed) interest rates are shifting rapidly, with the likelihood of a 0.25-percentage-point cut in December rising sharply…
New signals from allies of Fed Chair Jerome Powell supporting rate cuts, combined with gloomy U.S. economic data, are key factors strengthening this possibility.
Recently, the Fed has experienced significant internal division between those who want further rate cuts and those who want to keep the federal funds rate at its current level of 3.75–4%. But in recent days, Powell’s allies within the Fed have delivered remarks supporting a rate cut, paving the way for him to push for such a decision at next month’s meeting.
According to analysts, ahead of the final meeting of 2025, Powell faces two options.
The first option is to cut rates — as the market expects — and use the post-meeting statement to signal high conditions for additional cuts. This “cut-and-hold” approach resembles what Powell did at the end of 2019. At that time, just like now, a series of three consecutive rate cuts met strong opposition from many Fed members.
This approach may lead to dissatisfaction among members who oppose further cuts, but it could help end the situation in which these officials continue to express their disagreement, because the Fed would have created a new consensus that if current economic conditions persist, rates will not be cut further.
The second option is to keep rates unchanged and continue considering a possible cut at the January meeting — by which time the Fed will have additional data on employment and inflation to rely on. But this approach would prolong public discord within the Fed for another seven weeks, with no guarantee that new economic data will help resolve the disagreements.
Conflicting U.S. economic data is creating unprecedented division within the Federal Open Market Committee (FOMC) — the Fed’s policy-setting body — during Powell’s nearly eight-year tenure as Chair. Job growth is weakening while inflation remains far above target — signs of stagflation.
In an interview with the Wall Street Journal last week, Richmond Fed President Tom Barkin said the labor market is weakening but not collapsing, and inflation is not accelerating but also not decelerating meaningfully. Therefore, he believes it is “very hard for the Fed to declare victory” on either front.
In this context, Powell’s decision will depend on which risk he sees as greater and which issue would be harder to correct if he makes a mistake on rates.
Last Friday, New York Fed President John Williams said rates could still be cut “in the near term” without undermining the Fed’s inflation-fighting goals, while helping protect the labor market from weakening growth. He said bringing inflation back to the 2% target is essential, but “no less important is achieving the inflation goal without creating unnecessary risks” to the labor market.
Williams is a close ally of Powell, and after his remarks, market bets on a December rate cut rose to 70% from 40%.
On Monday, San Francisco Fed President Mary Daly — another Powell ally — also said she supports a December rate cut because she sees a rapid weakening of the labor market, which she believes would be harder to reverse than a resurgence in inflation.
“Inflation is not surging like during the pandemic. But in the labor market, I don’t think we can control the situation if the weakening continues. The labor market is very vulnerable,” she said.
On Tuesday (Nov. 26), bets on a December rate cut rose further to 85% after newly released economic data came in weaker than expected.
A report from the Bureau of Labor Statistics (BLS) showed U.S. retail sales in September rose just 0.2% from the previous month, below economists’ expectations of a 0.3% increase in a Dow Jones survey.
The BLS also reported that the Producer Price Index (PPI) for September rose 0.3% from the previous month, matching expectations, while core PPI rose only 0.1%, below the forecast of 0.2%.
Additionally, a report from employment services firm ADP showed that job losses in the U.S. private sector have accelerated over the past four weeks. On average, private-sector companies shed 13,500 jobs per week over the past four weeks, compared with a loss of 2,500 jobs per week in the prior period.
A report from the Conference Board showed U.S. consumer confidence plunged to 88.7 in November from 195.5 in October. This level is also lower than analysts’ expectations of a drop to 93.5.
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