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What you need to know
- The financial markets expect Fed officials will boost the economy in December with a cut in interest rates, despite signs that the inflation rate has been stubborn and the jobs market robust in recent months.
- The hurricanes of late September and early October complicate the task of those trying to determine the future of the employment market.
- Although job creation increased in November, this year’s average job growth rate has decreased, which suggests the Fed could be willing to lower borrowing costs for businesses.
- A Fed official was quoted as saying that the markets were betting on a rate cut.
Inflation stayed stubborn, and the job market bounced back in recent reports—but it was not enough to derail market expectations that the Federal Reserve would cut its influential interest rate in December.
The Fed’s policy committee is widely expected to reduce the Fed’s Fed funds benchmark rate by 0.25 percent points during its next meeting. According to CME Group’s FedWatch, which predicts rates based on futures trades, the markets were pricing an 85% probability of a rate cut. This would be the third time in as many meetings that a rate reduction has been announced.
Fed officials aim to lower interest rates to stimulate the economy without causing a spike in unemployment. However, they do not want to cause inflation to rise again like it did back in 2022. Cuts in the fed funds rate affect all types of interest rates, such as mortgages and credit card payments. “hotter” By encouraging borrowing and spending.
Fed policymakers are expected to move forward with the rate reduction they have been teasing for several months. Fed governor Christopher Waller indicated earlier in the week that he is inclined to favor a rate reduction. However, he said he was keeping an eye on recent data on inflation, which is still above the Fed’s goal of a 2% annual rate and has not made much progress in the right direction lately.
A report released on Friday showed that, while the economy is still growing, it has recovered from recent storms and the rate cut was not preventing high unemployment. Fed is responsible for setting the country’s monetary and fiscal policy. “dual mandate” The goals of fighting the inflation and protecting the employment market can sometimes be in opposition.
Is it a Self-Fulfilling Proclamation?
The Fed’s apparent willingness to reduce rates is a mystery. Economists have offered varying explanations.
Fed officials may be influenced by the financial markets to try and avoid any surprises. That's the theory put forward by economists Conrad DeQuadros and Jon Ryding at Brean Capital Markets.
"The Fed seems disinclined to disappoint market expectations, so the act of pricing the outcome of the next Fed meeting actually determines the result of the monetary policy decision," they wrote in a commentary. "If futures markets on the day of the next Fed meeting were pricing a 10% probability of a rate cut, we would guess that Fed would skip at the December meeting, but if markets are pricing a 90% probability—as they are now—we think the Fed would cut rates."
Another possibility is that the job market is truly slowing down, if not collapsing, so there's still pressure on the Fed to step in and rescue it. In the first six months of this year, on average 207,000 new jobs per month were created. Since July, however, each month has seen an average of 148,000 new jobs. Even excluding the hurricane-related dip in October, that's a downshift from the year's first half.
"November’s labor market data give the FOMC the green light to ease policy again this month," Samuel Tombs, chief economist at Pantheon Macroeconomics, wrote in a commentary.
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