The likelihood of the Federal Reserve cutting interest rates in December has significantly diminished following recent government data indicating robust job growth in the United States. Economists had previously anticipated a reduction in borrowing costs as a nearly assured outcome. However, the probability of a rate cut has plummeted to 22%, down from a staggering 97% as of mid-October, based on a poll conducted by financial data company FactSet.
According to the CME Fedwatch tool, which forecasts rate cuts by analyzing changes in the 30-Day Fed Funds futures prices, the chances of a reduction stand at approximately 41%. This shift suggests that both Wall Street economists and traders expect the Federal Reserve to maintain current rates during its two-day meeting scheduled for December 9-10, 2023. Such a decision would indicate a pause in the central bank’s recent trend of lowering lending rates, which has already seen reductions in September and October.
Job Market Remains Strong
The revisions in expectations stem from a six-week hiatus in federal economic data due to the government shutdown, which hampered the Federal Reserve’s capacity to analyze crucial economic indicators. In a statement last month, Fed Chair Jerome Powell underscored that a December rate cut was not a “foregone conclusion,” emphasizing the stability of the job market.
September’s jobs data revealed that employers added 119,000 positions, surpassing economists’ forecasts by more than double. While the unemployment rate increased from 4.3% to 4.4%, the rise indicates that more individuals are rejoining the workforce in search of employment opportunities. This dynamic was noted by Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, who stated that the “labor market continues to defy expectations.”
The current federal funds rate is positioned between 3.75% and 4%. Any move by the Fed to delay further rate cuts could perpetuate elevated borrowing costs for mortgages and auto loans, affecting many Americans who already feel the strain of high living expenses.
Inflation and Economic Indicators
The Federal Reserve’s dual mandate requires it to balance both inflation and unemployment. While the central bank cited a slowdown in the labor market when it opted to lower borrowing costs earlier this fall, the latest payroll gains challenge this narrative. In September, inflation measured an annual rate of 3%, adding pressure on the Fed to prevent price increases from escalating further.
The mixed economic signals complicate the Fed’s decision-making process, particularly given the lack of recent official data. The Bureau of Labor Statistics announced that it will incorporate some October job data into its November report, which will be released after the Fed’s next meeting on December 16, 2023.
Preston Caldwell, chief U.S. economist at Morningstar, remarked that the more favorable jobs data suggests that the Fed is likely to forgo a rate cut in December. He also indicated that if the negative trends in the labor market persist, the Fed might resume cuts at its next meeting in January 2026.
The evolving economic landscape presents a complex challenge for policymakers as they navigate the balance between fostering growth and controlling inflation. As the Federal Reserve prepares for its upcoming meeting, all eyes will remain on the economic indicators that will shape its decisions moving forward.
