Key Takeaways
- In major reversal, the odds of a December interest rate cut have risen to 79% from around 40% earlier this month.
- The jump in expectations came after New York Fed President John Williams said further policy easing may be appropriate.
- Fed officials have been increasingly divided on policy, with some favoring more cuts and others advocating for a pause amid a muddy economic picture.
The on-again, off-again chances of an interest rate cut from the Federal Reserve in December are suddenly back on.
Amid a tug of war between Fed officials who favor further cuts to prop up a cooling labor market and those who’d rather keep rates steady as insurance against rising inflation, bond futures traders have dramatically repriced their expectations of a cut at the central bank’s final meeting of the year. The odds of a quarter-point reduction are now hovering around 79%, according to data from the CME FedWatch Tool, up from 69% on Friday. That’s a major change from earlier this month, when the odds dropped below 50% from more than 95% in mid-October.
US Fed Officials Driving Swings in Rate Cut Expectations
The change comes after weeks of increasingly hawkish sentiment from those on the Fed’s policy-setting committee advocating for a pause in the easing cycle, citing the threat of inflation still hovering above the central bank’s target and strong measures of growth in some areas of the economy. Meanwhile, policy doves are more concerned about a slowdown in the labor market.
Also up for debate is how close interest rates are to “neutral”—a theoretical level which neither stimulates nor restricts economic growth. Rates higher than neutral are considered restrictive, and are intended to keep inflation in check by raising borrowing costs and slowing growth. Rates low enough to encourage growth and hiring are considered accommodative.
The driving factor for the recent repricing appears to be New York Fed President John Williams, who said the door was open for a rate cut in prepared remarks delivered Friday. “I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions,” he said. “Therefore, I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral.” He pointed to risks to the labor market that have worsened as job growth has cooled and wage growth has moderated, while upside risks to inflation have lessened.
Will the US Fed Cut Rates in December?
A December cut would bring the target federal-funds rate to a range of 3.50%-3.75%. After holding rates steady for more than a year, central bankers cut in September and again in October.
The October decision highlighted the deepening divisions among members of the Federal Open Market Committee. One member dissented in favor of a larger rate reduction, while another favored no change at all. “While some policymakers … are more concerned about the softening labor market, others worry more about persistent inflation, particularly after recent election-related affordability concerns,” explains Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth.
Williams falls into the camp favoring lower rates. Kansas City President Fed Jeff Schmid, who cited high inflation in his October dissenting vote in favor of leaving rates unchanged, is in the camp that would prefer to leave rates higher for now.
Disruptions to official data caused by the recent government shutdown are also muddying the outlook. The White House said last week that the October Consumer Price Index report—a key measure of inflation—will not be released. Jobs data for the month of September showed a decidedly mixed picture, and the next round of official employment data will not be released until after the Fed’s next meeting.
