The Federal Reserve will almost certainly slash interest rates at its December meeting. Friday’s jobs report sealed the deal, offering the Fed enough breathing room to act without looking reckless.
Nonfarm payrolls rose by 227,000 in November, blowing past expectations, while unemployment inched up to 4.2%. Markets barely blinked, with CME Group now pricing in a 90% likelihood of a cut. But here’s the thing: this isn’t the good news it might seem.
Critics are already piling on, accusing the Fed of setting the stage for risky speculation. Inflation is still alive and kicking, wages are climbing, and some say financial conditions have become too loose. Meanwhile, the central bank faces tough questions about just how far it can push without throwing the economy off balance.
Why the timing looks shaky
Economists are split, and the skeptics are loud. Chris Rupkey, an economist, argued the Fed doesn’t need to meddle, especially when jobs are plentiful. He called the central bank’s strategy “increasingly unwise” and warned that inflation hasn’t been tamed. The numbers back him up.
Core inflation, measured by the Fed’s favorite yardstick, ticked up to 2.8% in October. That’s far above the Fed’s 2% target. Wage growth isn’t helping either. At 4%, it’s significantly higher than pre-pandemic norms.
Jason Furman, a former Obama administration economist, isn’t buying the Fed’s optimism either. He pointed out that the pace of wage growth aligns more with 3.5% inflation, not the 2% the Fed wants. “This is another data point in the no-landing scenario,” Furman said.
He predicts more rate cuts will follow, but only after unemployment climbs further.
Financial conditions are looser than they look
Fed officials like to call their 4.5%-4.75% interest rate “restrictive,” but financial conditions tell a different story. Stocks are up, bond yields are down, and mortgage rates have dipped.
By the Fed’s own metrics, financial conditions are now at their loosest since January. This raises a crucial question: Is the Fed cutting rates in an already loose environment, and if so, what happens next?
Jerome Powell, the Fed’s chair, has been bullish on the U.S. economy. He recently called it “the envy of the developed world,” suggesting there’s enough cushion to recalibrate policy slowly. But not everyone on the Federal Open Market Committee (FOMC) shares his enthusiasm.
Cleveland Fed President Beth Hammack wants to pump the brakes. Speaking Friday, she said she needs more evidence that inflation is heading toward the Fed’s 2% goal. Hammack has been vocal about slowing the pace of rate cuts, and her comments suggest the Fed might pause after December.
If the December cut goes through, it will mark a full percentage point drop since September. That’s a lot of easing in a short time. Hammack believes the Fed is approaching the so-called neutral rate—the level that neither boosts nor restricts economic growth. She thinks it’s time to reassess. “It makes sense to slow the pace of rate reductions,” she said.
The clock is ticking. Once these numbers are in, the Fed enters a quiet period, meaning no policy addresses until the meeting concludes.
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Source: https://www.cryptopolitan.com/fed-decides-december-rate-cut/