Futures markets are pricing in a near certainty that it will cut rates by another quarter of a percentage point, bringing them down to a range of between 3.5% and 3.75%
THE US Federal Reserve is poised to continue its rate-cutting cycle this week, as a timely deterioration in jobs data spared the central bank a tricky Yuletide.
But the central bank – which is meeting for the final time in 2025 on Tuesday (Dec 9) and Wednesday – could still play Scrooge for the global markets, with another warning that inflation will soon put a stop to the rate-cut party.
Futures markets are pricing in a near certainty that the Fed will trim rates by another quarter of a percentage point, bringing them down to a range of between 3.5 per cent and 3.75 per cent.
The wild card remains the committee’s position on future moves.
At his customary post-meeting press conference, Fed chairman Jerome Powell is likely to deliver another “hawkish cut”, balancing the action on rates with cautions to markets against expecting more cuts, said economists at Bank of America (BOA) Global Research in a note to clients.
That would be a replay of Powell’s October gambit. The policy move could briefly push up the value of Treasury bonds and US equities, but the Fed chief’s comments could well be negative for both bonds and stocks.
“Powell will likely raise the bar for further easing at the press conference, indicating that preemptive ‘risk management’ cuts are over for now,” noted economists at brokerage BNP Paribas.
In September, at the beginning of the current rate-cut cycle, Powell made clear that the rate cuts were more insurance against a possible labour-market recession than a reaction to any actual slowdown.
This week, however, the Fed may indicate that it is in a more reactive phase, and only willing to cut rates if employment data become more favourable.
Earlier last week, reports of a drop in November private-sector payrolls and increased layoffs sparked a rally in stocks and bonds. Private employers shed 32,000 jobs in November, according to payroll firm Automated Data Processing (ADP).
The Fed’s policy is seen as so critical, however, that these dire figures were actually received as good news.
The hope is that the clear deterioration in the jobs market will lead to a streak of rate cuts, and stop the latest bout of inflation in its tracks – via wage hikes and disposable income, the health of the labour market can be a major inflation factor. Mortgage rates are coming back down to tempting territory for home buyers, at around 6 per cent on a 30-year loan.
The bulls’ narrative is a tenuous one. Weekly US jobless data and continuing claims – which are a broader measure of the jobs market than the ADP data – point to a more solid jobs market.
“In-line (inflation data) for September should cement a rate cut at the Fed meeting, but it continues to point toward a sticky inflation situation,” said Bret Kenwell, chief investment strategist at online brokerage eToro, in an emailed commentary.
He noted that goods inflation, which had eased earlier this year, is again an issue. “The question will quickly shift from the December interest-rate decision to the committee’s 2026 projection,” he added.
Powell is getting close to his swansong, but the lessons he and his board learned in the last decade – of how inflation can creep up on an economy and knock it to its knees – could still inform the post-Powell Fed.
US President Donald Trump has all but anointed his chief economic adviser Kevin Hassett to succeed Powell, likely in May 2026. The likelihood that Hassett, the director of the National Economic Council of the United States, will push the rate cuts favoured by Trump, has sparked talk of “Hassett-backed securities”, said the BOA economists.
But Hassett, as well as Trump’s recent appointee to the Fed Stephen Miran, could require support from more hawkish members of the board to continue the recent series of interest-rate cuts.
The stock market is right back around where it was before the Fed’s October meeting tripped up the bulls. The market foundered in November as Fed funds futures markets cast doubt on the assumption that the central bank would cut rates at its meeting this week.
The Dow Jones Industrial Average soared to a record high last week, however, after a weak private-jobs survey quashed those doubts.
One big hint about how the Fed will act came from its New York president John Williams, who said on Nov 21 that he saw room for a reduction in the “near term”. The market reacted quickly, and economists have said there is a more than 90 per cent chance for rates to be cut this week.
A group of economists polled by Bloomberg also expect the Fed to take a short breather before carrying out two more reductions in 2026, in March and September.
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