Fed Divided on December Move: Prioritize Jobs or Curb Inflation?

The probability of a Federal Reserve rate cut in December has surged to 67.3%, driven by a combination of internal policy debates, liquidity injections, and economic uncertainties. While Fed officials remain divided on the path forward, recent actions and statements suggest the central bank is leaning toward easing, even as it grapples with the dual risks of inflation and a potential labor market downturn.

Federal Reserve Governor Lisa Cook, currently embroiled in a legal battle with President Donald Trump over her removal, emphasized that the risk of a labor market slowdown outweighs inflationary pressures. "Future policy is not on a predetermined path," she said at a Brookings Institution event, noting that "both sides of the dual mandate-price stability and full employment-present heightened risks," as reported in an Asiae article. Her remarks align with San Francisco Fed President Mary Daly, who described the recent 25-basis-point rate cut as "appropriate" given a weakening jobs market but stressed the need to maintain "modestly restrictive" policy to curb inflation, according to a Morningstar article.

The Fed's cautious approach is underscored by recent liquidity measures. Over five days, the central bank injected $125 billion into the banking system through overnight repo agreements-the largest single-day injection of $29.4 billion on October 31-amid declining bank reserves. Analysts have labeled this as "stealth easing," arguing that while Fed Chair Jerome Powell maintains a hawkish public stance, these actions effectively lower short-term borrowing costs and ease credit conditions, according to a Coin Edition analysis. The move has bolstered market expectations, with the CME FedWatch Tool pricing in a 67.3% chance of a December cut and a 22.3% probability of a larger cut by January, the Coin Edition analysis added.

However, not all Fed officials share this view. Chicago Fed President Austan Goolsbee warned that inflation could accelerate next year, expressing caution about further cuts. "For the past four and a half years, inflation has exceeded the target and is moving in the wrong direction," he said in an interview with Yahoo Finance, as reported by Asiae. Similarly, Fed Governor Stephen Myron, a vocal advocate for aggressive easing, argued that the central bank is "too restrictive" and called for a 50-basis-point cut at every upcoming meeting to avert a recession, another point highlighted in the Asiae coverage.

The debate reflects broader uncertainties. While the Fed's October rate cut brought the benchmark rate to 3.75-4.0%, inflation remains above 2%, and labor market indicators show signs of fragility. U.S. factory activity contracted at a faster pace in November, and corporate hiring freezes have ended, signaling potential strain on employment, according to the Morningstar article. These dynamics have left policymakers in a delicate balancing act. "We need to continue to put downward pressure on inflation but not hold the reins so tight that we injure the labor market," Daly cautioned, as noted in the Morningstar coverage.

The market response has been mixed. Bitcoin, which often benefits from liquidity boosts, has seen a 3.4% decline in the past day amid volatility, though some analysts argue that the Fed's repo injections historically act as a tailwind for risk assets by improving sentiment and funding conditions, the Coin Edition analysis observed. Meanwhile, the Fed's decision to halt balance-sheet runoff on December 1 has been interpreted as a signal that tightening is nearing its end, the same Coin Edition piece noted.

With the December meeting approaching, the Fed's path remains unclear. As Krishna Guha of Evercore ISI noted, the recent comments from Cook and Daly suggest the central bank is "twice as likely to cut in December as not," aligning with current market pricing, according to an IndexBox analysis. Yet, as Powell reiterated, "We should not take a December rate cut for granted. In fact, we are far from that," a caution reflected in the Asiae reporting.