Doubts grow over a Fed rate cut in December

SAN FRANCISCO - A growing number of Federal Reserve policymakers are signalling reticence on further cuts to US interest rates, helping push financial market-based odds of a reduction in borrowing costs in December to below 50 per cent.

Doubts about a Fed rate cut in December sank US stocks on Nov 13, with S&P 500 sinking 1.66 per cent, the Nasdaq 2.29 per cent and the Dow 1.65 per cent.

As if to underscore the knife-edge decision, San Francisco Fed president Mary Daly – until now a firm supporter of the Fed’s rate cuts – said on Nov 13 that any decision about four weeks ahead of the next policy meeting is “premature.”

“I have an open mind, but I haven’t made a final decision on what I think, and I’m looking forward to debating with my colleagues,” Dr Daly said during an event in Dublin, Ireland.

Minneapolis Fed president Neel Kashkari, who, like Dr Daly, said just a couple of months ago that he felt a third rate cut by the end of this year would be warranted, told Bloomberg News on Nov 13 that he had opposed October’s rate cut because of resilience in the US economy, and is on the fence about December.

“We have inflation that’s still too high, running at about 3 per cent,” he said in brief welcoming remarks earlier in the day at a conference hosted by his regional Fed bank. “Some sectors of the US economy look like they’re doing great. Some sectors of the labour market look like they’re under pressure.”

Short-term interest rate futures, the best real-time gauge of financial market expectations for Fed policy, now reflect a 47 per cent chance that the rate-setting Federal Open Market Committee (FOMC) will lower borrowing costs on Dec 10, when the Fed wraps up its last policy meeting of 2025. Earlier this week, the contracts indicated a 67 per cent likelihood of a cut.

A rate-cutting pause appears to be on the mind of Boston Fed president Susan Collins, who on Nov 12 said she sees a “relatively high bar” for additional easing in the near term.

“Absent evidence of a notable labour market deterioration, I would be hesitant to ease policy further, especially given the limited information on inflation due to the government shutdown,” Dr Collins told a bankers conference in Boston, adding that the policy rate will likely need to stay on hold “for some time”.

The unusually blunt remarks from Dr Collins, who voted for both of the Fed’s rate cuts in 2025, illustrate deepening divisions at the US central bank and point to the lack of consensus around another reduction in borrowing costs.

Fed chairman Jerome Powell flagged those challenges two weeks ago after the central bank cut its policy rate to the 3.75 per cent to 4 per cent range. Another rate cut at the Dec 9 and 10 policy meeting, he said, is “far from” assured, especially when the lack of official data means less visibility on the true state of the economy.

After Dr Collins’ remarks – and White House guidance on Nov 12 that official inflation and labour market data skipped over because of the shutdown is likely to be incomplete even if it is released ahead of the Fed’s meeting – financial markets backed away from previously firm bets on another quarter-percentage-point reduction in the policy rate in December.

More dissents possible at December meeting

Whatever the decision in December, Mr Powell may face more than the two dissents cast against October’s rate cut, when Kansas City Fed president Jeffrey Schmid said elevated inflation argued against further easing and Fed governor Stephen Miran called for a bigger half-percentage-point cut because he felt inflation was falling faster than is widely appreciated.

Since then, others among the 12 Fed policymakers who vote on rates have signalled their caution about further cuts. They include St Louis Fed president Alberto Musalem, who repeated on Nov 13 he feels monetary policy needs to “lean against” inflation, and Fed vice-chairman Philip Jefferson, who said proceeding slowly is particularly prudent given the official data vacuum.

If the FOMC decides to hold rates steady, Dr Miran could be joined in a dissent by the Fed’s other Trump-appointed governors Christopher Waller and Michelle Bowman, both of whom have argued for easier policy.

Economic data not decisive

Data published by the private sector and derived from the Fed’s own surveys since October may boost arguments for either side. US firms were shedding more than 11,000 jobs a week through late October, payroll processor ADP said on Nov 11. Meanwhile, TLR Analytics says its sales tax diffusion index is not throwing off economic warning signs.

Private data on inflation is harder to come by. Apollo chief economist Torsten Slok estimates the prices on 55 per cent of items that make up the US consumer price index are rising faster than 3 per cent. The Fed has a 2 per cent inflation target.

“This is the reason why it is difficult for the Fed to cut interest rates in December,” Mr Slok wrote on Nov 12. REUTERS