Fed to Cut Rates Again in December on Weakening Job Market

• The U.S. Federal Reserve is expected to lower its key interest rate by 25 basis points next month, according to 80% of economists polled by Reuters, marking a slight increase in consensus from last month’s survey. This would represent the third consecutive rate cut, taking the federal funds rate to 3.50%–3.75%. Of the 105 economists surveyed, 84 expect a cut, while 21 expect no change. The move is intended to support a weakening labour market, which remains a key concern for policymakers.
• Despite growing consensus among economists, there is clear disagreement within the Federal Open Market Committee (FOMC) about whether another rate reduction is warranted this year. The divide is deepened by the absence of key official data amid the longest government shutdown in U.S. history. Chair Jerome Powell has warned that a December cut is not a foregone conclusion, following last month’s quarter-point reduction that drew rare dissent in two directions.
• According to Abigail Watt, U.S. economist at UBS, the labour market “still looks relatively weak,” justifying another rate cut. However, she cautioned that the risk for December lies in new data dispelling that sense of weakness. A temporary funding bill approved by the Senate could reopen the government and clear some of the data fog before the Fed’s next meeting. Watt also noted a growing tension between labour market concerns and inflation risks, warning that the Fed’s dual mandate may become harder to balance as inflationary pressures rise.
• The Personal Consumption Expenditures (PCE) index, the Fed’s preferred inflation gauge, has remained above the 2% target for over four years, the longest stretch since 1995. Economists polled expect inflation to stay above 2% through 2027. Josh Hirt, senior economist at Vanguard, cautioned that persistent inflation above target could undermine Fed credibility, especially if public perception shifts suddenly. He also warned against viewing tariff-driven inflation as merely temporary, urging greater policy caution.
• Nearly 70% of respondents to the Reuters poll (36 of 52) said job growth has remained steady since the shutdown began, even as private data indicate job losses. Sixteen economists reported that hiring had worsened, while none said it improved. The unemployment rate, last recorded at 4.3% in August, is expected to remain steady this quarter and rise modestly to 4.5% next year.
• The U.S. economy, which expanded 3.8% in Q2 and an estimated 2.9% in Q3, is forecast to slow sharply to 1.0% in Q4, according to poll medians. Economists expect growth to average around 1.8% annually through 2027, broadly aligning with the Fed’s non-inflationary growth rate estimate.

(Source: Reuters)