The Fed Faces Uncertainty in Its Final Rate Decision of the Year
The US Federal Reserve is set to hold its final interest rate meeting of the year, and it appears that this decision could be one of the most divided in recent memory. Despite this, financial markets are largely expecting a third consecutive interest rate cut, indicating a strong level of confidence in the central bank’s direction.
During the Fed’s last meeting in October, Chair Jerome Powell emphasized that a rate cut in December was not guaranteed, highlighting the differing opinions among officials. However, recent developments suggest that there is growing support for another rate reduction, particularly due to concerns about the labor market.
Inflation and Labor Market Concerns
Minutes from the Fed’s most recent meeting revealed that many officials anticipate an increase in underlying goods inflation as a result of President Donald Trump’s tariffs. This has added complexity to the decision-making process, as the central bank must balance its dual mandate of price stability and maximum employment.
Despite inflation still being above the Fed’s 2% target, several leading officials have expressed support for another rate cut, citing the weakening labor market as a key concern. This shift in sentiment has created uncertainty around the outcome of the upcoming meeting.
Key Influencers and Market Reactions
New York Fed Bank Chief John Williams has made notable comments in favor of a rate cut, which UniCredit described as a significant “intervention.” As one of the most senior members of the Fed committee, Williams’ remarks are likely to have been approved by Powell, according to UniCredit.
The Fed typically keeps rates high to curb inflation, but a deteriorating jobs market may push policymakers to lower rates further to stimulate economic growth. Kathy Bostjancic, Chief Economist at Nationwide, noted that this time is different, as the outcome of the upcoming meeting remains uncertain.
Financial markets responded positively to Williams’ statement on November 21, where he suggested that rates could decrease in the “near term.” Futures markets now show more than 87% probability that the Fed will cut rates to between 3.50% and 3.75%, according to CME FedWatch.
Limited Data Availability
The Fed has been in rate-cutting mode this fall, with cuts in September and October. However, a government shutdown from October 1 to November 12 disrupted the flow of critical data, making it difficult for the central bank to assess whether inflation or employment should be the priority.
The latest available data showed the unemployment rate increased slightly from 4.3% to 4.4% in September, even though hiring exceeded expectations. The delayed release of October’s job and inflation figures has further complicated the situation, with these reports expected to be published alongside November’s data—after the upcoming rate meeting.
The US personal consumption expenditures price index rose to 2.8% annually in September, up from 2.7% in August, according to delayed data released on Friday.
A Paradoxical Situation
Gregory Daco, Chief Economist at EY-Parthenon, described the Fed’s current situation as paradoxical. While the central bank claims its decisions will be data-dependent, there is a lack of timely data to inform its choices. Daco expects a “weak majority” to support another rate cut, but he also anticipates multiple dissents.
Looking Beyond Powell
In addition to the upcoming rate decision, the Fed will also release projections for its 2026 economic and monetary policy outlook. This period will mark a significant transition, as Powell’s tenure as chair comes to an end in May.
President Trump has criticized Powell for not cutting rates aggressively enough and has indicated that Kevin Hassett, his chief economic adviser, could succeed him. Hassett has aligned closely with Trump on key economic issues, but if appointed, he may face pressure from financial markets to take a different approach if inflation worsens.
Daco noted that while political appointees often maintain some level of independence, the Fed’s decisions require a board majority. Whoever Trump chooses will need Senate confirmation, and while UniCredit predicts minimal political interference, deeper consequences cannot be ruled out.
“We have not assumed Trump will get de-facto control of the Fed,” UniCredit said, adding that such an outcome is “a non-negligible risk.”