Fed Rate Cuts: December Decision Looms Amid Economic Uncertainty

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Potential December Rate Cut in Focus, Fed Remains Cautious

The U.S. Federal Reserve (Fed) is facing internal divisions regarding future rate cuts, as economic uncertainties continue to cloud its decision-making process. This was highlighted in the latest minutes from the Federal Open Market Committee (FOMC) meeting. In its November meeting, held on November 6-7, the Fed opted to reduce interest rates by 25 basis points, bringing the target range to 4.50%-4.75%. However, questions remain about the outlook for the December meeting and beyond, particularly as we head into 2025.

Why Did the Fed Cut Rates in November?

The Fed's decision to lower rates in November was largely driven by efforts to curb inflation and address signs of a weakening labor market, which indicated that the U.S. economy could be slowing. According to Chairman Jerome Powell, the economy’s “uncertain prospects” and ongoing risks related to inflation and employment played a key role in the rate cut. While inflation showed signs of moderating and labor market conditions appeared to soften, Powell also emphasized that the Fed would remain data-dependent, offering no firm guidance on further rate cuts.

Recent Data and Changing Expectations

Since the Fed’s November decision, new economic reports—such as the September inflation figures and strong retail sales in October—have softened expectations for additional rate cuts. These positive signs suggest inflation is stabilizing and consumer spending is holding up, leading some to wonder whether the Fed will proceed with further reductions.

FOMC Minutes Reveal Divergence Among Fed Members

The minutes from the November meeting shed light on differing views within the FOMC. While some members favored a cautious, data-driven approach to rate cuts, others argued for a more aggressive stance. Members agreed that unemployment had risen but remained low, and inflation was making progress toward the 2% target, though still slightly elevated. The minutes indicated that, depending on future economic data, the Fed might gradually shift to a more neutral monetary policy. However, there were also concerns that the labor market or economic growth could weaken faster than expected, leading some members to advocate for faster cuts. At the same time, others were wary of pausing rate cuts if inflation remained stubbornly high.

The Influence of Trump’s Policies

The economic outlook is further complicated by the potential impact of Donald Trump’s return to the political stage. His recent threats of imposing new tariffs and his potential for expansive fiscal policies have raised concerns about renewed inflationary pressures. Should these policies take shape, they could reverse the Fed’s rate-cutting strategy, forcing the central bank to pause or even raise rates again to combat inflation.

What’s Likely in December?

While the likelihood of a rate cut in December seemed high just a month ago, the recent positive economic data and the uncertainty around Trump’s influence on inflation have added complexity to the situation. However, the prevailing expectation is that the Fed will proceed with a 25 basis point cut at its December 18 meeting, bringing the total reduction for the year to 75 basis points.

According to the CME FedWatch Tool, there is currently a 66.5% chance of a 25 basis point rate cut in December, with a 33.5% probability of no change. This represents a shift toward optimism regarding a December rate cut, as expectations have strengthened over the past week.

Looking Ahead

As the Fed prepares for its December meeting, it faces a challenging economic environment. Positive data, including stabilizing inflation and resilient consumer spending, is tempered by ongoing risks, particularly the potential for inflationary pressures from Trump’s economic policies. While a rate cut in December seems likely, the Fed’s decisions will remain highly dependent on evolving economic conditions. With uncertainty still lingering, the coming weeks will be crucial in shaping the Fed’s approach to monetary policy in 2025.