Will the Federal Reserve end rate cuts after December? This possibility perhaps should not be ruled out.
Wednesday's inflation data showed that consumer prices rose 2.7% year-on-year in November, up from 2.6% in October, but the market seemed unfazed. The S&P 500 index rose 0.8% that day, and the Nasdaq closed above 20,000 points for the first time. This reflects a sigh of relief in the market, as the inflation data only met expectations rather than rising further.
Nevertheless, the data confirms a disturbing trend, namely that the decline in inflation has stopped, or at least stalled. Core consumer prices excluding food and energy rose 3.3% year-on-year, similar to the pace of increase in recent months. Particularly concerning is that service sector inflation, excluding energy services, rose 4.6% year-on-year.
This seems insufficient to prevent the Federal Reserve from planning to cut rates at the December meeting. According to CME's FedWatch tool, as of Wednesday, the futures market is pricing a 96% probability of this occurring.
Market bets, the gradual slowdown in hiring over the past few months has left the Federal Reserve still satisfied with some additional easing policies. Factors such as strikes and hurricanes have made the data somewhat difficult to interpret, but the basic trend is still very clear: the three-month average of job growth has decreased from 243,000 at the beginning of 2024 to 173,000 in November.
The pricing of interest rate futures also shows that after December, the Federal Reserve is expected to have two to three rate cuts of 25 basis points by the end of next year.
This may be too optimistic. Despite the economic slowdown, job growth remains substantial, and the overall economic momentum is still strong, with an annualized growth rate of 2.8% in real GDP for the third quarter. Meanwhile, the inflation rate is now clearly stagnating around 3%, above the 2% target level. Given this, what compelling reason does the Federal Reserve have to continue cutting rates?
This has not yet taken into account the policies that the Trump administration may adopt, such as tax cuts, immigration crackdowns, and new tariffs. It is still uncertain how many of these potential policies will materialize and when they will be implemented, but it seems likely that at least some of these three types of policies will come to fruition. And all of these policies could lead to inflation.
The Federal Reserve publicly insists that it has not even considered the impact of these policies. However, the public data has already given the Federal Reserve enough reason to pause rate cuts, and doing so will have the additional benefit of allowing it to wait and see what happens under Trump's leadership.
Therefore, at least do not expect the Federal Reserve to continue happily cutting rates in the first few months of next year. Moreover, do not overlook the possibility of a one-step approach in this round of easing: that is, the Federal Reserve will reduce rates by a full percentage point, and that’s it. Thus, December will be the last rate cut.
Article forwarded from: Jin Shi Data