The prospect of a Federal Reserve interest rate cut in December has diminished significantly, following robust U.S. job growth reported in September. Economists had previously predicted a high likelihood of a reduction in borrowing costs, but recent data has shifted expectations, with only a 22% probability of a cut according to a poll by financial data company FactSet. This is a notable decrease from a 97% likelihood observed in mid-October.
CME FedWatch, a forecasting tool that analyzes changes in the 30-Day Fed Funds futures prices, suggests a slightly higher chance of a reduction at about 41%. As a result, analysts and traders are anticipating that the Federal Reserve will maintain current rates during its two-day meeting on December 9-10, 2023. This decision would mark a pause in the central bank’s recent trend of rate cuts, which had occurred in September and October.
Job Market Resilience Impacts Rate Cut Expectations
The recent shift in outlook for the Federal Reserve’s monetary policy follows a six-week hiatus in federal economic data due to the government shutdown. This gap hindered the central bank’s ability to analyze vital economic trends. In a statement last month, Jerome Powell, Chair of the Federal Reserve, emphasized that a December rate cut was not a “foregone conclusion,” highlighting the ongoing strength of the job market.
The U.S. economy displayed notable resilience, with employers adding 119,000 jobs in September, surpassing expectations set by most economists. Despite the increase in hiring, the unemployment rate rose slightly from 4.3% to 4.4%, marking the highest level since October 2021. Analysts suggest that this uptick indicates more individuals are entering the workforce, seeking employment opportunities.
Ellen Zentner, Chief Economic Strategist at Morgan Stanley Wealth Management, noted in an email, “The labor market continues to defy expectations. Today’s stronger-than-expected jobs data highlighted ongoing U.S. economic resilience in the face of multiple challenges, but it also likely pulled the plug on a rate cut in December.”
Inflation Concerns and Future Projections
The current federal funds rate is set between 3.75% and 4%. A decision by the Federal Reserve to postpone rate cuts into 2026 could result in sustained high borrowing costs for mortgages and auto loans, contributing to the prevailing sentiment among many Americans that the cost of living remains elevated.
The Federal Reserve operates under a dual mandate to manage both inflation and unemployment. The central bank previously cited a slowing labor market as a reason for two rate cuts this fall. Yet, the recent payroll gains suggest a more complex economic landscape. Inflation has also been on the rise, with an annual rate of 3% recorded in September, raising concerns among policymakers about the potential for escalating price increases.
The mixed signals from the labor market and inflation data complicate the Federal Reserve’s decision-making process. The Bureau of Labor Statistics announced that it will consolidate some October jobs data into its November report, which will be released after the Fed’s upcoming meeting on December 16, 2023.
Preston Caldwell, Chief U.S. Economist at Morningstar, remarked, “Given that today’s numbers were not as bad as feared, combined with hawkish statements from the Fed recently, it does appear that the Fed will skip a cut in December. But with the negative trend in labor markets remaining in place, we’d expect the Fed to resume cutting in their next meeting in January 2026, if they do not cut this December.”
As the Federal Reserve navigates these challenges, the decisions made in the coming months will have significant implications for the U.S. economy and its trajectory moving forward.
