A Possible Pause in Interest Rate Cuts by Powell and the Fed in December

Economists and market participants largely expect the Federal Reserve to cut its benchmark interest rate by 0.25 percentage points at its December 18 meeting before pausing at its first meeting of 2025. This consensus has been reinforced by remarks from key Fed officials and the lack of contrary signals from other members.

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Tim Duy, chief economist at SGH Macro Advisors, noted that Fed Governor Christopher Waller’s inclination toward a December rate cut solidified market expectations. Former Fed Vice Chairman Roger Ferguson echoed this sentiment, suggesting that while the decision could be tight, a quarter-point cut followed by a pause was the most probable outcome.

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“This is going to be a close call, but they are likely to go with 25 basis points and then definitely be in pause and wait-and-see mode,” Ferguson remarked.

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However, following the release of November’s jobs report and other recent economic data, some are questioning whether the Fed should forgo a December rate cut altogether.

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The November jobs report revealed unexpected strength in the labor market, prompting debates about whether the Fed’s next move should even be a rate hike rather than a cut. Torsten Slok, chief economist at Apollo Management, noted that some hedge fund colleagues are entertaining this possibility.

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Currently, the Fed’s benchmark interest rate stands between 4.5% and 4.75%. As the December meeting approaches, several key considerations are shaping the debate.

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High Rates and the Labor Market

One primary argument for cutting rates is that the current level is deemed “restrictive,” potentially impeding the labor market. Fed officials worry that maintaining high rates for too long could overburden the economy, making it harder to reignite job growth if momentum stalls.

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Fed Governor Waller reiterated this point, stating, “I believe that monetary policy is still restrictive.”

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Yet, Slok challenged the notion that high rates are curbing the economy. He pointed to the Atlanta Fed’s GDPNow forecast, which projects fourth-quarter growth at an annualized rate of 3.3%—well above the 2% considered sustainable for the U.S. economy.

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The labor market also showed unexpected resilience in November, with the economy adding 227,000 jobs compared to the 214,000 forecast. Average hourly earnings rose by 0.4% month-over-month, pushing the annual growth rate to 4%.

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While Fed officials differ on what rate level constitutes “neutral”—neither stimulating nor restraining the economy—the highest estimate hovers around 4%. Former St. Louis Fed President James Bullard suggested that a December cut would bring rates closer to this equilibrium.

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The Inflation Factor

Another rationale for a December rate cut lies in the Fed’s belief that inflation is on a downward trajectory. Policymakers with a more dovish stance view recent inflationary upticks as temporary disruptions rather than systemic concerns.

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Fed Chair Jerome Powell belongs to this camp, remarking at a recent conference, “We’re not quite there on inflation, but we’re still making progress.”

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Julia Coronado, a former Fed staffer and president of MacroPolicy Perspectives, agrees. “The economy is out of the inflation emergency,” she said. “It was on fire and the Fed was clearly behind, but we’re not in that world anymore.”

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However, some economists advocate for a pause due to lingering inflationary risks. Robert Brusca, chief economist at FAO Economics, criticized the Fed’s assumption that inflation would naturally decline, even as rates are reduced.

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“They are assuming that inflation is going to go away by itself,” Brusca argued, expressing skepticism about the Fed’s outlook.

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Traders in derivatives markets currently assign a 90% probability to a December rate cut, reflecting strong confidence in this outcome. Historically, Fed officials have been cautious about deviating from market expectations to avoid unnecessary volatility.

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“Like it or not, the expectations built in the market will have to be removed pretty quickly, and I am not sure they have room to do that,” Ferguson commented.

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Still, Ferguson acknowledged the Fed’s capability to push back against consensus at the last minute. “This Fed is also capable of pushing back at the last minute, so we will have to see,” he added.

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As the Fed nears its final meeting of the year, the debate over its next move highlights broader uncertainties about the economy’s trajectory. Whether policymakers opt for a rate cut, a pause, or even a hike, their decision will likely set the tone for 2025 and beyond.

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With robust job growth, moderating inflation, and mixed signals from economic data, the Federal Reserve faces a pivotal moment. The December meeting will test its ability to balance competing priorities while maintaining market confidence in its strategy.

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