Fed's Rate Cut Debate: Labor Market Fears vs. Inflation Caution in Data-Scarce Environment

The Federal Reserve's December rate cut decision has grown increasingly uncertain, with markets pricing in roughly a 52% chance of a 25-basis-point reduction as of November 13, down sharply from 95% a month earlier. This shift reflects growing investor skepticism amid a lack of critical economic data ahead of the December 9-10 Federal Open Market Committee (FOMC) meeting. Federal Reserve Governor Christopher Waller, a vocal advocate for easing, has argued that a weakening labor market and slowing economic growth justify a cut to stabilize employment, but his stance contrasts with officials who remain cautious about inflation and economic resilience.

Waller highlighted deteriorating labor market signals, including below-expectation job creation, declining job postings, and corporate plans for layoffs, as justification for monetary easing. Data from September and October showed businesses adding just 6,500 jobs monthly on average, a sharp slowdown from earlier gains, while platforms like Indeed reported continued declines in new job listings. He also noted that automation and AI investments are exacerbating hiring challenges, particularly for new college graduates. Despite these concerns, Waller emphasized that inflation remains near the Fed's 2% target and that tariffs are not a persistent inflationary threat.

The Fed's decision is further complicated by a data vacuum. The October meeting minutes, due November 19, will provide the first detailed insight into policymakers' views, but key metrics like the September nonfarm payrolls report-delayed by the government shutdown-remain pending. Markets are now in "a coin toss" scenario, according to analysts, as investors weigh conflicting signals about the labor market and inflation. For example, while ADP's weak private-sector job loss estimates pressured Treasury yields, recent U.K. inflation data showing a slowdown to 3.6% has bolstered expectations for a December rate cut in London.

The Fed's dual mandate faces additional challenges. Richmond Fed President Thomas Barkin stressed the need for more data to assess inflation and unemployment trends before committing to a policy path. Meanwhile, the central bank has ended quantitative tightening, halting balance sheet reductions effective December 1, a move seen as neutral for financial conditions. In global markets, India's Reserve Bank of India is expected to cut its repo rate by 25 bps in December, while the Czech Republic announced a $19 billion nuclear expansion to reduce fossil fuel dependence.

Investors remain cautious about the Fed's political dynamics. President Trump's impending selection of a new Fed chair has raised concerns about potential politicization of monetary policy. Commerzbank's Thu Lan Nguyen warned that rate cuts driven by political pressure could weaken the dollar, exacerbating fiscal risks. In commodities, gold and silver prices have fallen on reduced rate-cut expectations, with gold dropping 3.4% over four sessions.

The Fed's December decision will likely hinge on the October meeting minutes and the delayed September payrolls report, both of which could shift market expectations. While Waller's arguments for easing highlight labor market fragility, the lack of consensus among officials and data gaps suggest a closely contested outcome.