Split Fed and Data Gaps Cloud December Rate Cut Outlook

The U.S. Federal Reserve faces mounting pressure to cut interest rates in December as markets increasingly price in the move, despite internal divisions and lingering data gaps from the recent government shutdown. With inflation showing signs of stabilization and labor market conditions cooling, analysts argue the central bank has enough evidence to justify another easing cycle, even as officials remain cautious about potential risks.

Recent consumer price index (CPI) data reinforced expectations of a rate cut, with annual inflation holding steady at 2.7% in November. Core inflation, which excludes volatile food and energy costs, which remained unchanged at 3.3%, aligning with forecasts and easing concerns about a resurgence of price pressures. "The slight uptick in overall prices isn't a trend reversal," said Scott Helfstein, head of investment strategy at Global X. Meanwhile, the Federal Open Market Committee (FOMC) minutes from its October meeting revealed dissent, with two members opposing the 25-basis-point cut. Kansas City Fed President Jeff Schmid, one of the dissenters, argued against any reduction, while Governor Stephen Miran advocated for a half-point cut. These divisions have left traders hedging their bets, with the probability of a December cut now hovering near 50%, down from over two-thirds a week earlier.

Compounding the uncertainty is the delayed release of key economic data due to the government shutdown. Jobless claims for mid-October surged to 232,000, exceeding expectations and signaling a weakening labor market. The Labor Department's delayed reports, including October's nonfarm payrolls, have left analysts relying on alternative indicators to gauge economic health. This data vacuum has made it harder for the Fed to calibrate its policy response, with Chair Jerome Powell recently stating a December cut is "not guaranteed".

Global factors also play a role. China's recent policy stimulus, including interest rate cuts and economic incentives, has boosted global commodity demand and eased pressure on U.S. agricultural exports. This shift follows a Trump-Xi trade deal that averted a potential U.S. farming crisis, though the Fed's decision-making remains clouded by the shutdown's disruption of BLS data collection. Additionally, Latin American economies, including Brazil and Mexico, show signs of slowdowns, adding to concerns about global growth.

The Fed's next move will hinge on whether recent inflation moderation and labor market softness outweigh risks like persistent services inflation and geopolitical volatility. While a December cut appears increasingly likely, a pause in January is now favored, with economists projecting fewer rate cuts in 2025 as the central bank navigates a delicate balance between cooling inflation and avoiding a recession.