Federal Reserve Meeting and Interest Rate Decisions
The Federal Reserve is anticipated to lower interest rates at an upcoming meeting this week, despite inflation remaining above its target level. This decision comes amid worries about a weakening labor market.
The central bank’s Federal Open Market Committee (FOMC) will make its interest rate decision public on Wednesday. Many in the markets are forecasting a 25 basis point cut, marking the third straight reduction. However, sentiment around this expectation has shifted recently.
Minutes from the last FOMC meeting revealed notable divisions among members concerning a potential December rate cut aimed at bringing rates closer to a neutral stance. Some policymakers expressed hesitation regarding the implications of cutting rates so soon on inflation.
Given the mixed signals from economic data, market expectations for a rate cut have considerably changed. The CME FedWatch tool now indicates a 30% chance of a cut on November 19, a significant drop from 98% a month ago. Yet, those odds rebounded slightly to 87% ahead of the December 5 meeting, despite ongoing concerns about the labor market.
Inflation and Labor Market Concerns
The inflation measure favored by the Fed shows that consumer prices rose again in September. Job cuts in 2025 have already reached 1,170,821 by November, the highest since 2020, as reported by Challenger, Gray & Christmas.
According to the ADP Employment Report, the private sector unexpectedly lost 32,000 jobs in November, as small and medium-sized enterprises saw job losses that overshadowed modest gains from larger companies.
This weak labor market data surfaced alongside the Fed’s preferred inflation indicator, the Personal Consumption Expenditures (PCE) index, which remains elevated at 2.8% for headline and 2.9% for core in September, partly due to the impacts of a government shutdown on data collection.
Policymaker Concerns Ahead of the Meeting
Gregory Daco, chief economist at EY Parthenon, pointed out that policymakers are faced with three key questions as they approach this meeting: how long inflation from tariffs will endure, the extent of labor market weakness, and how close monetary policy is to being neutral.
Daco noted that tariff-induced inflation continues to be a complex issue tied to various supply shocks, including trade policy shifts and demographic changes. He also mentioned expectations for core PCE inflation to rise to around 3.2% early next year before possibly declining to 2.3% by year’s end. The labor market appears increasingly challenging to evaluate with hints of decline, particularly as immigration slows and the population ages.
“Most indicators are now signaling a weak labor market after seeing two years of decline with rising unemployment and job cut announcements,” Daco remarked.
Debating the Rate Cuts
Michael Feroli, JPMorgan’s chief U.S. economist, stated there are compelling arguments both for and against rate cuts leading up to the policy meeting. The final decision might hinge on vote counts within the committee.
Feroli observed that while most governors seem to favor rate cuts, many Reserve Bank presidents lean toward maintaining the current rates. Notably, New York Fed President Williams indicated two weeks ago that there was room for additional rate cuts “in the near term.”
Feroli suggested that while a rate cut is possible, there could also be a “hawkish” tone associated with the announcement, potentially influencing decisions at the January policy meeting.
He anticipates at least two members will dissent against a rate cut, with one possibly advocating for a more significant reduction.
