Fed Divided on December Rate Cut: Jobs Fears Clash with Inflation Goals

San Francisco Federal Reserve President Mary Daly has emerged as a vocal advocate for a rate cut at the central bank's December 9-10 meeting, citing growing risks of a sudden deterioration in the U.S. labor market. In an interview with the Wall Street Journal, Daly warned that the job market's "nonlinear change" could occur without warning, emphasizing that "it's vulnerable enough now that the risk is it'll have a nonlinear change" according to Daly's analysis. Her stance underscores a shift in focus toward employment concerns, even as inflation remains above the Fed's 2% target.

Daly's position contrasts with some of her colleagues, who have prioritized inflation risks. For instance, Boston Fed President Susan Collins has argued that rates should remain unchanged, citing a labor market that is "cooling, but not rapidly" as reported. Meanwhile, Fed Governor Christopher Waller, a key dove, reiterated his support for a 25-basis-point cut in December, framing it as insurance against further labor market weakness. The divide highlights broader uncertainties within the Federal Open Market Committee (FOMC) as officials weigh the trade-offs between stabilizing employment and curbing inflation.

Daly acknowledged that inflation remains a challenge but argued that elevated prices are less urgent than job market vulnerabilities. She pointed to softer-than-expected tariff-driven cost increases as a factor easing inflationary pressures, stating that "an inflation breakout is a lower risk" compared to a potential jobs crisis. However, critics warn that premature cuts could limit the Fed's flexibility if the economy accelerates next year. One official noted that some colleagues fear cutting rates too quickly might "limit options" should inflation rebound or growth surge.

The debate occurs amid a fragile economic backdrop. Daly described the labor market as in a "low-hiring, low-firing" equilibrium but cautioned that "additional layoffs" or reduced hiring could trigger a sharper downturn. She stressed that the Fed could still achieve its inflation goal without raising unemployment, calling any failure to do so a policy failure. This view aligns with Waller, who argued that a December cut is warranted given "soft" labor market data and easing inflation trends as Waller stated.

Political pressures further complicate the Fed's calculus. President Donald Trump has publicly urged faster rate cuts and pledged to appoint a chair who would prioritize lowering rates. However, internal divisions suggest even a unified leadership might struggle to impose a consensus. As one analyst noted, "Powell is facing more internal resistance no matter what he chooses to do in December than to any other decision in his nearly eight-year tenure".

With the FOMC meeting approaching, markets will scrutinize the Fed's Beige Book and incoming data for clues. Waller warned that January's decision could hinge on a "flood" of delayed economic reports, adding to the uncertainty. For now, Daly's push for a December cut reflects a defensive strategy to preempt a potential jobs crisis, even as the Fed remains divided on the path forward.

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