Fed's December Rate Cut Looks Increasingly Like A Toss-up

Citing worries about inflation and signs of relative stability in the labor market after two U.S. interest rate cuts this year, a growing number of Federal Reserve policymakers are signaling reticence on further easing, helping push financial market-based odds of a reduction in borrowing costs in December to below 50%.

As if to underscore the knife-edge decision, San Francisco Fed President Mary Daly - until now a firm supporter of the Fed's rate cuts - said on Thursday any decision about four weeks ahead of the next policy meeting is "premature."

"I have an open mind, but I haven't made a final decision on what I think, and I'm looking forward to debating with my colleagues," Daly said during an event in Dublin, Ireland.

Minneapolis Fed President Neel Kashkari, who, like Daly, said just a couple months ago that he felt a third rate cut by the end of this year would be warranted, called the latest signals from the economy "mixed," a possible indication that he too is now on the fence.

"We have inflation that's still too high running at about 3%," he said in brief welcoming remarks at a conference hosted by his regional Fed bank. "Some sectors of the U.S. economy look like they're doing great. Some sectors of the labor market look like they're under pressure."

Short-term interest rate futures, the best real-time gauge of financial market expectations for Fed policy, now reflect a 47% chance that the rate-setting Federal Open Market Committee will lower borrowing costs on December 10, when the Fed wraps up its last policy meeting of 2025. Earlier this week the contracts indicated a 67% likelihood of a cut.

COLLINS SAYS SHE IS HESITANT ON FURTHER EASING

The latest nod to the need for a rate-cutting pause came from Boston Fed President Susan Collins, who on Wednesday said she sees a "relatively high bar" for additional easing in the near term.

"Absent evidence of a notable labor market deterioration, I would be hesitant to ease policy further, especially given the limited information on inflation due to the government shutdown," Collins told a bankers conference in Boston, adding that the policy rate will likely need to stay on hold "for some time."

The unusually blunt remarks from Collins, who voted for both of the Fed's rate cuts this year, suggest deepening divisions at the U.S. central bank and point to the lack of consensus around another reduction in borrowing costs. Fed Chair Jerome Powell flagged those challenges two weeks ago after the central bank cut its policy rate to the 3.75%-4.00% range.

Another rate cut at the December 9-10 policy meeting, he said, is "far from" assured, especially when the lack of official data means less visibility on the true state of the economy.

After Collins' remarks, and guidance from the White House on Wednesday that, even with the reopening of the U.S. government, official inflation and labor market data may not be published in time for the Fed's next meeting, if ever, financial markets backed away from previously firm bets on another quarter-percentage-point reduction in the policy rate next month.

MORE DISSENTS POSSIBLE AT DECEMBER MEETING

Whatever the decision in December, Powell may face more than the two dissents cast against the rate cut last month, when Kansas City Fed President Jeffrey Schmid said elevated inflation argued against further easing and Fed Governor Stephen Miran, opens new tab called for a bigger half-percentage-point cut because he felt inflation was falling faster than is widely appreciated.

Since then, others among the 12 Fed policymakers who vote on rates have signaled their caution about further cuts. They include St. Louis Fed President Alberto Musalem, who worried about policy becoming too easy, opens new tab, and Fed Vice Chair Philip Jefferson, who said proceeding slowly, opens new tab is particularly prudent given the official data vacuum.

Non-voting Fed policymakers, including Atlanta Fed President Raphael Bostic and Cleveland Fed President Beth Hammack, have also expressed a preference for holding rates steady, opens new tab.

"Boston Fed President Collins' decision to speak out clearly against a December cut raises our level of concern about Powell's struggle to manage deep divisions within the FOMC and creates additional uncertainty over the path of rates," Evercore ISI Vice Chairman Krishna Guha wrote in a note on Thursday.

Should the Powell-led Fed cut rates, he wrote, Schmid could be joined in a dissent by Collins and Musalem and even additionally by Chicago Fed President Austan Goolsbee or Fed Governor Michael Barr.

If the FOMC decides to hold rates steady, Miran could be joined in a dissent by the Fed's other Trump-appointed governors, Christopher Waller and Michelle Bowman, both of whom have argued for easier policy.

ECONOMIC DATA NOT DECISIVE

Data published by the private sector and derived from the Fed's own surveys since October may boost arguments for either side.

U.S. firms were shedding more than 11,000 jobs a week through late October, payroll processor ADP said on Tuesday. Meanwhile TLR Analytics says its sales tax diffusion index is not throwing off economic warning signs. "Sales tax receipts are quite strong, and the two-month average is above 50%," analysts there said.

Private data on inflation is harder to come by.

Torsten Slok, chief economist at Apollo, estimates the prices on 55% of items that make up the Consumer Price Index, the best-known measure of inflation, are rising faster than 3%.

The Fed has a 2% inflation target.

"This is the reason why it is difficult for the Fed to cut interest rates in December," Slok wrote on Wednesday.

Source: Kitco