Fed's December Rate Cut Hangs on Inflation vs. Jobs Market Battle

The Federal Reserve is set to enter a blackout period ahead of its December policy meeting, with market participants and analysts maintaining expectations for a rate cut despite internal divisions and shifting economic signals. Recent developments, including recalibrated forecasts from major institutions and pivotal remarks from Fed officials, have reinforced the belief that policymakers will ease borrowing costs by year-end.

The Fed's October meeting minutes, released earlier this week, revealed a "strong split" among policymakers regarding the December decision, according to the Wall Street Journal. While some officials expressed caution over inflation, others argued that the labor market's gradual cooling and modestly restrictive policy stance justified a cut. This division mirrors broader debates within the central bank, where officials balance concerns about persistent price pressures against signs of economic resilience.

Morgan Stanley, which recently reversed its stance on a December rate cut, cited robust employment data as a key factor in its revised outlook. The bank now projects the first cut to occur in January 2026, followed by reductions in April and June. This shift reflects the Fed's evolving calculus, as strong job gains-such as the September payroll increase of 119,000-have complicated the case for rapid easing. However, the firm's analysis underscores the uncertainty surrounding the Fed's path forward, with markets still pricing in a roughly 73% probability of a December cut as of last week.

The most influential catalyst for renewed optimism came from New York Fed President John Williams, whose speech last week signaled openness to further rate reductions. "I view monetary policy as being modestly restrictive... Therefore, I still see room for a further adjustment in the near term," Williams stated, according to Marketscreener. His comments, delivered at a Central Bank of Chile event, prompted traders to shift bets toward a December cut, with futures markets reflecting a near-60% chance of a 25-basis-point reduction. As a top Fed official and permanent voter on the rate-setting Federal Open Market Committee, Williams' remarks carry significant weight, particularly amid internal disagreements over the timing of easing.

The Fed's leadership troika-including Chair Jerome Powell and Vice Chair Philip Jefferson-has not publicly clarified the December outlook, fueling speculation about potential dissents. Some regional bank presidents, such as Boston's Susan Collins and Dallas' Lorie Logan, have advocated for maintaining rates at current levels until inflation shows clearer signs of returning to the 2% target, according to TradingView. However, Williams' support for near-term action has bolstered market confidence that the Fed will prioritize growth concerns alongside its inflation mandate.

The debate reflects broader economic tensions. While inflation remains above target-September's CPI at 3% and PCE at 2.8%-policymakers have noted that price pressures may ease as the impact of tariffs wanes, according to Marketscreener. Meanwhile, the labor market, though showing signs of softening (e.g., a 4.4% unemployment rate in September), remains resilient enough to justify cautious optimism about a "soft landing." This duality has left the Fed in a delicate balancing act, with officials wary of both premature easing and prolonged tightness.

As the December meeting approaches, markets will closely watch for clues in the Fed's statement and press conference. A rate cut would align with the central bank's historical tendency to respond to evolving data, but any deviation from expectations could trigger volatility. For now, the confluence of strong institutional forecasts, influential official comments, and persistent economic resilience has solidified December as a critical inflection point in the Fed's policy trajectory.