Federal Reserve Likely to Cut Interest Rates Amid Economic Uncertainty

As the Federal Reserve's December 9–10 policy meeting approaches, a significant majority of economists anticipate a 25 basis point reduction in the federal funds rate, despite notable divisions among Fed policymakers.

A recent Reuters poll, conducted between November 28 and December 4, surveyed over 100 economists, with 82% expecting the Fed to lower interest rates by 25 basis points during the upcoming meeting. This consensus emerges amid internal disagreements within the Federal Open Market Committee (FOMC), where some officials express concerns about persistent inflation and question the appropriateness of further easing following recent rate cuts. Chair Jerome Powell has emphasized caution, particularly given the delayed economic data resulting from a prolonged government shutdown. The forthcoming meeting is poised to address these differing viewpoints and clarify the Fed's monetary policy direction amid ongoing economic uncertainties.

Economists' Expectations

The Reuters poll indicates that a substantial majority of economists foresee a 25 basis point rate cut in December. This expectation is supported by market indicators; the CME FedWatch Tool shows a high probability of such a cut. Economists argue that the rate cut would support a cooling labor market, with Fed officials noting it could be done without derailing inflation goals.

Internal Divisions Among Fed Policymakers

Despite the consensus among economists, there is notable division within the FOMC. Some officials express concerns about persistent inflation and question the appropriateness of further easing following the recent rate cuts. Chair Jerome Powell has emphasized caution, particularly in light of a prolonged government shutdown that delayed key economic data. In the October meeting, the decision to cut rates by 25 basis points was not unanimous. Fed Governor Stephen Miran dissented, advocating for a larger 50 basis point reduction, while Kansas City Fed President Jeffrey Schmid preferred to hold rates steady.

Economic Indicators Influencing the Decision

Recent economic data presents a mixed picture. U.S. jobless claims fell to 191,000 during Thanksgiving week, the lowest level since September 2022, suggesting that layoffs remain low. However, hiring also remains sluggish, indicating a "low-hire, low-fire" job market. Inflation remains above the Fed’s 2% target, and uncertainty over future monetary easing has increased hedging activity in financial markets. Median forecasts predict continued inflation above 2% through 2027 and modest economic growth averaging 2.0% in both 2025 and 2026.

Market Reactions and Global Context

Market indicators reflect the anticipation of a rate cut. The CME FedWatch Tool shows a high probability of a quarter-point cut next week. The U.S. dollar has weakened amid expectations of a Fed rate cut, pushing the euro near a seven-week high and offering some relief to the yen. Internationally, other central banks are also adjusting their monetary policies. The Bank of Japan is likely to raise its policy interest rate from 0.5% to 0.75% in December, marking its first hike since January 2025.

Potential Implications of a Rate Cut

A rate cut could have several implications:

• Borrowing Costs: Lower interest rates typically reduce borrowing costs for consumers and businesses, potentially stimulating spending and investment.

• Housing Market: The average U.S. 30-year mortgage rate has fallen to 6.19%, down from 6.23% the previous week and close to its lowest point this year. Further rate cuts could make home loans more affordable, potentially boosting the housing market.

• Savings and Investments: While borrowers may benefit from lower rates, savers could see reduced returns on interest-bearing accounts. Investors might shift towards equities in search of higher returns, potentially inflating stock prices.

Conclusion

The upcoming Federal Reserve policy meeting is highly anticipated, with a majority of economists expecting a rate cut. Internal divisions within the FOMC and mixed economic indicators add complexity to the decision. The outcome will have significant implications for the economy, markets, and global financial landscape. The meeting is expected to address these differing viewpoints and provide clarity on the Fed's monetary policy direction amid ongoing economic uncertainties.