Fed: Will Interest Rates Be Cut?
The latest figures on US employment and inflation finally provide a partial yet enlightening snapshot of the economy. Just days before the Federal Reserve meeting on December 9-10, monetary policymakers are publicly divided on which priority to focus on: curbing inflation or supporting employment. This division leads the markets into an unpredictable dance.
A Slowing American Economy
The delayed release of the September employment report, postponed due to the shutdown, provides an initial signal: the labor market is slowing down, but not abruptly. With 119,000 jobs added and unemployment rising to 4.4%, the indicator remains in a zone of controlled slowdown. The Bureau of Labor Statistics (BLS) offers an important nuance: figures from previous months have been revised downward, notably by -26,000 for August, and an adjustment bringing July down to 72,000 jobs added. This triple downward revision confirms that the US economy lost momentum in the middle of summer.
On the pricing front, the Producer Price Index (PPI) for September shows overall inflation rising moderately (+0.3% month-on-month, +2.7% year-on-year). However, the most closely watched statistic is core inflation: excluding energy and food, it is slowing significantly (0.1% month-on-month; 2.6% year-on-year), its lowest level since July 2024. This is a key point, as this indicator is what the Fed uses to assess whether the economy is converging towards its 2% target.
While these figures should logically reassure the more accommodative members of the FOMC, the absence of October data complicates the overall reading. The shutdown prevents the full release of the CPI index and a crucial employment report needed to assess economic momentum. In this statistical fog, each statement from a governor carries more weight than the data itself.
Rate Cut Now Expected
This information gap comes at a time when Fed officials are speaking in a disjointed manner. Some stress the need for extreme « caution » and maintaining rates until inflation is solidly anchored. Others, conversely, believe that the labor market slowdown demands quicker support, even if it means tolerating slightly above-target inflation for a few quarters.
This cacophony immediately affects the markets. The CME FedWatch index, a benchmark barometer, jumped from a 30% probability to over 80% for a 25 basis point cut in December within a few days. Just the previous week, this probability stood at 65%. This drastic shift illustrates the prevailing uncertainty: the economy isn't sending clear signals, official data is lacking, and the Fed appears to draw opposing conclusions from the same figures.
For investors, the situation is reminiscent of periods when monetary discourse dominated the markets in the absence of macroeconomic visibility. On Wall Street, each interview with a central bank member leads to significant fluctuations in both bonds and stock indices. As one analyst ironically summarizes: « On the markets, it's like at the White House: the last person to speak is right."
In this context, upcoming intermediate indicators take on disproportionate importance. Weekly jobless claims on December 4th and the PCE index— the Fed's preferred measure— will release their numbers before the FOMC meeting. The University of Michigan confidence index, expected on December 5th, will also serve as a psychological barometer to determine if the economy is holding steady or faltering as winter approaches.
Monetary Shift or Extended Caution?
As the December 9-10 meeting approaches, two perspectives are at odds. The first suggests that the Fed no longer has a reason to maintain a restrictive policy: the labor market is slowing down, core inflation is receding, and a symbolic 25 basis point cut would send a measured signal of confidence without completely easing monetary pressure. The second maintains that the slowdown in employment is not pronounced enough to justify a pivot, and that the risk of an inflation rebound—amid a charged political environment—urges caution.
The difficulty lies in the fact that missing data prevents this debate from being resolved in any way other than by intuition. The Fed itself is in an unprecedented situation: making a decisive decision without consolidated visibility. The markets, meanwhile, have already cast their vote. The question remains whether they will be ahead this time… or completely off the mark.
This content has been automatically translated using artificial intelligence. While we strive for accuracy, some nuances may differ from the original French version.
