Fed Officials Cautiously Cool December Rate Cut Hopes Amid Inflation and Data Gaps

Federal Reserve policymakers have signaled growing caution toward aggressive rate cuts, with several regional bank presidents emphasizing that current interest rates are nearing neutral territory and further easing may not be warranted. On November 13, St. Louis Fed President Alberto Musalem stated that policy rates are “closer to neutral” than restrictive, suggesting the central bank could maintain its stance without triggering excessive economic stimulus . This assessment aligns with broader concerns about persistent inflation, which remains above the 2% target at 3%, and the need to avoid overstimulating a labor market showing early signs of cooling .

The Federal Open Market Committee (FOMC) faces a delicate balancing act as it navigates conflicting signals. While two rate cuts have been implemented this year, officials like Cleveland Fed President Beth Hammack argue that rates should stay in a “restrictive range” to continue pressing downward on inflation. Minneapolis Fed President Neel Kashkari echoed this, noting that 3% inflation is still “elevated” and that some labor market indicators, such as rising corporate layoffs, suggest a slowdown is underway . San Francisco Fed President Mary Daly added that the trade-off between price stability and maximum employment has returned to a more balanced state, but she warned that services sector inflation remains stubborn .

Market expectations have already shifted in response to these warnings. According to CME Group’s FedWatch tool, the probability of a December rate cut dropped to roughly 50% from over 60% following the officials’ remarks, reflecting a recalibration of investor confidence . This aligns with data from Polymarket, which reported odds of a December cut at 52%, underscoring heightened uncertainty . Crossmark CEO Bob Doll observed that the Fed’s messaging frames further easing as a “possible option” rather than a committed path, urging investors to prepare for prolonged higher rates .

The central bank’s decision-making is complicated by a critical data gap. Government shutdowns have disrupted the release of official employment and inflation reports, forcing policymakers to rely on private data sources. ADP’s October private-sector employment estimate of 42,000 new jobs contrasts with a surge in weekly layoffs, while Challenger, Gray & Christmas reported a 106% year-over-year increase in planned layoffs for October, reaching 153,000 . Consumer sentiment also weakened, with the University of Michigan’s November index falling to 50.3, a 2022 low, as respondents expressed dimmer views of employment and income prospects .

Despite these challenges, Fed officials have not dismissed the need for flexibility. Musalem acknowledged that restoring reliable, real-time public data is essential but emphasized that financial market indicators, repo market activity, and payment system trends still provide a “reasonable judgment” of economic conditions . This approach highlights the Fed’s reliance on indirect metrics to gauge inflationary pressures and labor market dynamics in the absence of timely official statistics.

The broader implications of this policy stance extend beyond U.S. borders. Global markets, particularly those in emerging economies, have priced in tighter U.S. monetary conditions for longer, affecting capital flows and currency valuations. Meanwhile, the Fed’s cautious tone contrasts with accommodative stances in some other major central banks, such as the Bank of Japan, creating a complex landscape for international investors .

As the FOMC approaches its December meeting, the focus will remain on whether incoming data—both official and private—can clarify the trajectory of inflation and labor market strength. For now, policymakers appear content to wait for more clarity, even as market participants adjust to the possibility of a prolonged pause in rate reductions.