Fed's December Dilemma: Balancing Inflation and Jobs Amid Data Delays

The probability of a 25 basis point interest rate cut by the Federal Reserve in December has surged to 82.7%, driven by shifting rhetoric from key policymakers and evolving economic data. This marks a significant reversal from earlier uncertainty, with traders now pricing in a near-certain reduction in borrowing costs as the central bank weighs its dual mandate of stable prices and maximum employment according to Pagaya's analysis.

The decision hinges on a complex interplay of factors. New York Fed President John Williams, a pivotal voice in the debate, stated in prepared remarks at a Chilean conference that the Fed has "room" for further monetary policy easing. He emphasized that inflation control remains the primary objective, while acknowledging the labor market's need for adjustment. "I view monetary policy as being modestly restrictive, although somewhat less so than before our recent actions," Williams said, underscoring the delicate balancing act between inflation and employment according to analysis.

Complicating the Fed's calculus is the delayed release of critical economic data. The Bureau of Labor Statistics canceled October's jobs and inflation reports and postponed November's figures to after the December 9-10 policy meeting, leaving policymakers reliant on private-sector data and anecdotal evidence according to USAToday reporting. Michael Gregory, deputy chief economist at BMO Capital, noted this creates a "riskier" decision environment, as officials must infer October and November labor market conditions from incomplete metrics like ADP payrolls and the Beige Book.

The long-awaited September jobs report, released last week, added another layer of ambiguity. While the headline 119,000 jobs figure exceeded expectations, revisions to prior months revealed downward adjustments-4,000 fewer jobs in August and 7,000 fewer in July. The unemployment rate edged up to 4.4%, and wage growth showed signs of softening according to Yahoo Finance reporting. JPMorgan's Michael Feroli described the Fed's path as a "very close call," with the central bank now leaning toward skipping a December cut but likely resuming easing in early 2026.

The market expectations, as reflected in the CME FedWatch tool, have fluctuated wildly. The probability of a cut jumped from 39% to 73% following Williams' comments, then stabilized near 82.7% as traders incorporated the latest data. Pagaya's analysis highlighted growing confidence, noting that the odds for a January cut stand at 83% and could reach 91% by March according to Pagaya's analysis.

Internal divisions within the Federal Open Market Committee persist. While "several" members see a December cut as appropriate, "many" argue no further action is needed this year, according to minutes from the November meeting. Fed Governor Christopher Waller defended the use of alternative data, stating that "surrogate indicators" like soft labor market conditions and stable inflation expectations justify a cut according to USAToday reporting.

With the Fed's decision now hinging on a razor-thin margin, investors remain on edge. The delayed data and conflicting signals from officials have amplified uncertainty, leaving the December meeting as a pivotal test of the central bank's ability to navigate an unpredictable economic landscape.