The Federal Reserve's decision on interest rates in December is shaping up to be a nail-biter, with policymakers divided on whether to continue cutting rates amid concerns about inflation.
A Tough Call for the Fed
Fed officials are facing a challenging dilemma. On one hand, they have concerns about inflation, which remains stubbornly high at around 3%. On the other, there are signs of stability in the labor market, with some sectors doing well while others face pressure.
Market Odds: A Close Call
Financial markets are reflecting this uncertainty. The odds of a rate cut in December have dropped to just 47%, indicating a close call. This is a significant shift from earlier this week, when the likelihood of a cut was at 67%.
Divided Opinions
The Fed's policymakers are divided on the matter. Some, like Boston Fed President Susan Collins, are signaling a high bar for further easing. Collins, who supported the previous rate cuts, now sees a need for caution, especially given the limited data available due to the government shutdown.
Minneapolis Fed President Neel Kashkari, who previously supported a third rate cut, now describes the economic signals as "mixed." This suggests he, too, is wavering in his stance.
Open-Minded, But Cautious
San Francisco Fed President Mary Daly, a former supporter of rate cuts, is now taking a more cautious approach. She believes it's premature to make a decision four weeks ahead of the next policy meeting. Daly emphasizes the need to keep an open mind and engage in debate with her colleagues.
A Lack of Consensus
The Fed Chair, Jerome Powell, has acknowledged the challenges in reaching a consensus. He stated that another rate cut in December is "far from" assured, especially with the lack of official data. This uncertainty has led financial markets to back away from their initial bets on a rate cut.
Potential for More Dissents
If the Fed decides to cut rates in December, Powell may face more dissents than the two he received last month. Kansas City Fed President Jeffrey Schmid and Fed Governor Stephen Miran have already expressed opposing views. Schmid argued against further easing due to elevated inflation, while Miran called for a larger cut, believing inflation is falling faster than expected.
Other policymakers, including St. Louis Fed President Alberto Musalem and Fed Vice Chair Philip Jefferson, have also signaled caution. Non-voting Fed policymakers, such as Atlanta Fed President Raphael Bostic and Cleveland Fed President Beth Hammack, have expressed a preference for holding rates steady.
The Impact of Economic Data
Private sector data since October provides a mixed picture. While payroll processor ADP reports a weekly loss of over 11,000 jobs, TLR Analytics' sales tax diffusion index shows strong sales tax receipts.
Inflation data is also a challenge, with Apollo's chief economist, Torsten Slok, estimating that prices for 55% of items in the Consumer Price Index are rising faster than 3%. This makes it difficult for the Fed to justify a rate cut in December, according to Slok.
A Controversial Decision
The Fed's decision in December will be a crucial one, with potential implications for the economy and financial markets. With deep divisions within the FOMC, Powell faces a challenging task in managing the diverse opinions. The path of interest rates remains uncertain, and the outcome could spark differing opinions among economists and market participants.
What do you think? Should the Fed continue cutting rates, or is it time to hold steady? Share your thoughts in the comments below!
