The Federal Reserve is to lower interest rates in December, but going forward for monetary policy in the next quarter is hazy. The November jobs report had come in just solid on job growth-which left the central bank with an elbow room so that they could go about and greenlight the interest rate cuts. The payroll data alongside the continued soundness of the U.S. economy has increased chances of an interest rate reduction in December to nearly 90% chances, a CME Group report notes.
But cutting rates further doesn’t come without controversy as economists like Joseph LaVorgna, Chief Economist for SMBC Nikko Securities, and Chris Rupkey, Senior Economist of FWDBONDS argued that the Fed risks is too high to cut interest rates again. LaVorgna cautioned that this rate cut may encourage speculative bubble while Rupkey said that Fed’s approach of cutting interest rates is ever more imprudent since persistent inflation remains. Former White House economist Jason Furman added that continued wage growth and inflationary pressures, particularly in the labor market, may mean the economy could end up in a no-landing scenario, where growth continues but feeds inflation.
A far stronger November jobs report revealed an uptick of 227,000 positions-a significant step up from the lower figures in October. It does suggest solid performance in the labor market, even with the rise in the unemployment rate to 4.2 percent. However, inflation remains an issue, with the Fed’s preferred measure of inflation increasing to 2.3% in October while wages keep rising above pre-pandemic levels. All this makes for complex Fed decision-making.
Another critical factor influencing policy is the loosening of financial conditions. Although the Fed has maintained a restrictive stance on interest rates, other economic indicators, such as stock market performance and corporate bond yields, suggest that financial conditions are more accommodative than intended. This has led some of the Fed officials, among them Cleveland Fed President Beth Hammack, to hint that a slower pace in the rate cuts may be needed, as the economy is getting close to a “neutral” monetary policy position.
This cut is expected in December, but there is still much debate regarding future rate moves, especially in early 2025. The bottom line is that all these will depend on various factors, such as the inflation trend and the state of the labor market.
