December Fed cut: FOMC members in for ‘rare, suspenseful’ meeting

Leading up to this week, the prevailing mood has been one of disappointment that the FOMC will not deliver a final cut for 2025, a measure that many analysts have had in mind since this summer. A week ago, investors hedged their bets with a 50/50 probability of a 25 basis point cut from its current position of 3.75% to 4%.

But things have changed quickly, based on data and comments from FOMC members, and at the time of writing, CME’s FedWatch gauge puts an 81% probability of a rate cut early next month.

A key part of the shift came after comments by John Williams of the New York Fed, who joined voices like Trump appointee Stephen Meeran and Gov. Chris Waller in calling for a cut. Analysts warned this morning that it may be necessary to tread with a pinch of salt: Members will wonder whether their peers are truly dovish, or whether they are ruffling feathers in order to attract President Trump’s attention and secure his nomination to be Fed chair next year.

Data does not make the path clearer. The first payroll report after the end of the government shutdown painted a dull picture of the labor market. Powell described it as a “low-employment, low-fire” environment. The unemployment rate remained relatively stable at 4.4%, and the jobs market added a relatively small 119,000 jobs in September.

Offsetting the tepid employment outlook, which is just one part of the Fed’s mandate, is the issue of inflation. FOMC members recognize that inflation remains comfortably ahead of its 2% target, a trend that is likely to come into greater focus during a period of rising consumer spending.

This combination means that holiday spending data is more attractive than usual; In fact, it is “crucial,” writes Jeremy Siegel, professor emeritus of finance at the Wharton School of the University of Pennsylvania.

Writing for WisdomTree yesterday, where he serves as chief economist, Siegel added: “Real-time credit card readings and retail commentary will reveal much more about underlying consumer momentum than the reactionary-looking payrolls reports that remain distorted by the shutdown. Strong spending will push the Fed toward a pause in December; soft spending makes the December meeting truly alive.”

“As such, this is the most uncertain FOMC meeting in years because the committee itself doesn’t know the answer yet,” Siegel added. “[Chair Jerome] Powell prefers to signal decisions early, but data simply doesn’t speak loud enough.

Siegel added that Williams’ signal of openness to a downgrade is a “ground” from the dovish camp, while hawks insist the data isn’t strong enough either way to prompt action: “It sets up a rare and truly highly anticipated meeting — one where investors should expect volatility around both the statement and the new conspiracy.”

Motivation question

Goldman Sachs Chief Economist Jan Hatzius shares Chairman Williams’ view, arguing that September payrolls data is weak enough to prompt a cut. In a note released Sunday, Hatzius wrote: “His view is likely to be consistent with that of Chair Powell — who almost certainly wrote three cuts in the September dot plan — and a majority of the 12 FOMC members, but not necessarily a majority of all 19 FOMC participants.”

“With the next jobs report scheduled for December 16 and the CPI [the consumer price index] As for December 18, there’s not much on the calendar that could derail the sale on December 10.

However, with Chairman Powell likely to step down next year — much to the delight of President Trump, who has repeatedly criticized him for refusing to lower the base rate — it may be difficult to separate the true doves from those auditioning for the role.

As UBS chief economist Paul Donovan said this morning: “US Fed Governor Waller, whom President Trump sees as a candidate for Fed chairman, backed Trump’s calls for further interest rate cuts yesterday. Waller called for a rate cut in December, which excited markets somewhat, although Waller justified this with suggestions that the US labor market may be in trouble.”

Donovan responded that the higher inflation rate is being absorbed by US households saving less, which indicates a level of confidence in the labor market. Donovan added: “If Waller is right, the US economy is at very high risk, and this should be a major concern for financial markets.

“However, if this invitation is merely a skillfully disguised cry that says: ‘Choose me! Pick me!” If you target Trump, markets will focus on the benefits of monetary easing rather than the risks it claims to offset.