A lot of experts and traders think that the Federal Reserve will lower its key interest rate by another quarter of a percentage point on December 18. They will then take a break until their first meeting in 2025.
Tim Duy, chief economist at SGH Macro Advisors, said that this expectation was strengthened by the fact that other Fed officials “lack pushed back” and key Fed Governor Christopher Waller said he was moving towards a December cut.
Another person who thought the Fed would cut rates this month was Roger Ferguson, who used to be a vice chairman of the Fed.
“This is going to be a close call in the end,” Ferguson said. “They are likely to go with 25 basis points and then definitely be in pause and wait-and-see mode.”
But after seeing the November jobs report on Friday and other new information, a lot of economists and market players are wondering if the Fed should just take a break in December.
Chief economist at Apollo Management Torsten Slok said that his hedge fund friends have even begun to talk about whether a rate hike should be the next thing the Fed does. The Fed’s main rate is now between 4.5% and 4.75%.
Here are some of the most important questions about the Fed’s choice in December.
Would it hurt the job market if rates stay high?
One main reason Fed officials give for keeping rates low is that they are now “restrictive,” which means they are too high and slowing down a healthy job market. Some people are afraid that this brake will stop the job market for too long, which is known to be very hard to get going again.
Waller said in his Monday speech, “I think that monetary policy is still restrictive.”
Slok from Apollo, on the other hand, said it was hard to see any proof that interest rates were slowing down the economy.
He said that the Atlanta Fed’s GDPNow estimate shows that growth will speed up to 3.3% per year in the fourth quarter. This is a lot higher than the steady 2% growth rate that the U.S. economy is thought to be at.
A lot of important parts of the job market were also better than expected in November.
Adding 227,000 jobs in November was better than the 214,000 jobs that were expected. The average hourly wage went up by 0.4%, which raised the yearly rate to 4%, which was also higher than expected.
Fed officials can’t agree on what rate would be “neutral,” which means not putting the foot down on the gas or the brake. But Fed sources say that 4% is the most likely number.
James Bullard, who used to be president of the St. Louis Fed, said that rates would be “pretty close to where they need to be” after a cut in December.
The inflation rate is going down.
A big reason why the Fed is making another cut is that they think inflation is going down.
“The more hawkish Fed officials are more worried about the recent data, while the more dovish ones see it as just a hiccup,” Duy said.
The head of the Federal Reserve, Jerome Powell, agrees with this.
In a speech to the New York Times on Wednesday, Powell said, “We’re not quite there on inflation but we’re still making progress.”
Julia Coronado, head of MacroPolicy Perspectives and former Fed employee, said the economy is “out of the inflation emergency.”
“The market was on fire, and it was clear that the Fed was behind it,” Coronado said.
But experts who want the Fed to stop raising rates are more worried about inflation.
CEO of FAO Economics Robert Brusca said, “I don’t quite understand where the Fed gets this idea that inflation is going to keep going down even as it cuts rates.”
He told them that they think inflation “will go away on its own.”
If the Fed skips December, the market might be shocked.
There is now a 90% chance that rates will be lowered in December, according to traders in option markets. When the Fed changes rates, they don’t want to surprise the markets.
Ferguson said, “Whether they like it or not, the market expectations will have to be taken away pretty quickly, and I’m not sure they have room to do that.”
He also said, “But this Fed can also back down at the last minute, so we’ll have to see.”
