Fed’s December Cut Debate Heats Up, Now With More Data
Hu Yousong / Xinhua via Getty Images
Traders are watching Federal Reserve Chair Jerome Powell and his colleagues’ debate as rate-cut odds shift in real time.
Federal Reserve officials are sharply divided over whether to cut interest rates in December, with some citing cooling labor data and others warning inflation remains too high.
The split has fueled volatility in markets, with investors’ expectations for a December rate cut swinging wildly as new data and Fed comments emerge.
Markets are quite confused about whether the Federal Reserve will cut rates in December, as Fed officials’ sharp divide on that question plays out in public.
One camp argues lowering interest rates next month would help a job market that’s showing signs of weakening. The other argues inflation remains above the Fed’s 2% target and sees more signs of economic strength.
Rather than clarify the debate, the return of missing economics data that went dark during the shutdown is equipping each side with more information. Each camp is making their leanings clear as the Fed’s Dec. 9-10 meeting approaches.
Investors face heightened volatility as the Fed’s next move grows uncertain. Whether policymakers cut or hold will shape borrowing costs, market sentiment, and the 2026 outlook for growth and inflation.
“It’s striking that both sides of the debate have high-conviction compelling arguments—cut based on cooling labor conditions or hold because of lingering inflation risks,” Ian Lyngen, head of U.S. rates strategy at BMO Capital Markets, wrote in a note to clients.
The long-delayed September report is a “perfect Rorschach test” for Fed officials, Matthew Luzzetti, chief U.S. economist at Deutsche Bank, wrote in a note to clients. That is, their reading of the September report will likely depend on which camp they fall into.
Those on the hawkish end will likely point to the 119,000 jobs added in September as a sign that the economy isn’t tanking. Those on the dovish end may instead point to the uptick in the unemployment rate, which rose to 4.4% from 4.3% and is at its highest level since October 2021.
The public debate has prompted a wild ride in markets’ views of Fed policy. Investor views of a near-certain cut in December got dampened on Oct. 29, when Fed Chair Jerome Powell said a December cut is “not a foregone conclusion.”
By Thursday, traders saw a rate cut as unlikely. The probability of a Fed cut had dropped to 39%, according to the CME Group’s FedWatch tool, which uses futures market pricing to gauge investors’ views on Fed meetings.
On Friday, however, the chances of a rate cut swung back up and are now over 70%. The catalyst: a speech from New York Fed President John Williams, who put himself in the dovish camp by saying he sees “room for a further adjustment in the near term.”
Williams’ voice is key since the New York Fed leader is highly influential at FOMC meetings. He framed his view within the two goals that Congress gave the Fed: ensure maximum employment and stable prices.
The Fed’s progress toward bringing down inflation back to its 2% target has “temporarily stalled,” he acknowledged, with inflation closer to 3% today.
But the “upside risks to inflation have lessened somewhat,” he said, forecasting that inflation will get back to 2% in 2027.
While tariffs may continue driving prices up somewhat, there aren’t signs of “second-round” effects or “broad-based supply chain bottlenecks” that could lead to a cycle of rising prices, he said.
While it’s “imperative to restore inflation to our 2% longer-run goal,” Williams said, it’s equally important to avoid “creating undue risks to our maximum employment goal” by keeping rates high.
Fed Governor Christopher Waller said this week—before September’s jobs report—that he backs a December rate cut due to weakening job conditions. He flagged rising unemployment claims in state-level data and sluggish private sector job data for October.
“My focus is on the labor market, and after months of weakening, it is unlikely that the September jobs report later this week or any other data in the next few weeks would change my view that another cut is in order,” he said.
Other Fed officials have seemed closer to favoring staying on hold, flagging inflation as a continued risk.
“I am concerned that we’re seeing inflation still at around 3% and our target is 2%,” Fed Governor Michael Barr said at an event Thursday, according to Bloomberg News. “So we need to be careful and cautious now about monetary policy, because we want to make sure that we’re achieving both sides of our mandate.”
Progress toward inflation returning to 2% “seems to have stalled out,” Chicago Fed President Austan Goolsbee said at a Chartered Financial Analyst Society of Indianapolis event.
“That makes me a little uneasy,” Goolsbee said.
One of the Fed’s more hawkish voices, Cleveland Fed President Beth Hammack, said on Thursday that inflation has been above the Fed’s 2% goal for more than four years.
“Lowering interest rates to support the labor market risks prolonging this period of elevated inflation, and it could also encourage risk-taking in financial markets,” Hammack said.
There is still a bit more data coming between now and Dec. 10, with a delayed retail sales report for September seen as a key gauge of consumer spending.
“I expect to learn a lot between now and the next meeting,” Philadelphia Fed President Anna Paulson said on Thursday.
Paulson said she’s “a little more worried about the labor market than I am about inflation,” but kept her options open, noting she’s “approaching the December FOMC cautiously.”
The Fed’s picture of the economy will also be less complete than usual, given that the official reports for jobs and inflation in October are now canceled. November’s jobs report will also come out on Dec. 16, later than usual and after the Fed’s Dec. 9-10 meeting.
Given that the September jobs report was stronger than expected, the Fed is likely to opt for a “dovish hold in December,” Michael Gapen, chief U.S. economist at Morgan Stanley, wrote in a note to clients.
That means keeping rates unchanged in December—but signaling more cuts are coming in 2026.
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