The Fed’s December Cut Is Now a Toss-Up

Key takeaways

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• Deep divide: After back-to-back 25 bp cuts (Sep, Oct) to 3.75%–4.00%, officials are split on a third move in December.
• Data blackout effect: The shutdown halted official jobs and inflation reports, letting each camp lean on private data and anecdotes.
• Hawk view: Inflation risks persist; consumer spending is steady; tariff costs could be passed through in 2026; policy may already be near neutral.
• Dove view: Payroll growth has stalled; wage growth is cooling; rates remain restrictive; risk of over-tightening into a weak labor market.
• Powell’s stance: Managed expectations at the Oct. presser, saying a December cut is “far from” assured to keep a fractious committee aligned.
• Procedural flexibility: Some officials see Dec and Jan as interchangeable; a compromise is a Dec cut paired with tighter forward guidance.

What’s new

• Hawk hardening: KC Fed’s Schmid dissented in Oct. Non-voters (Cleveland’s Hammack, Dallas’s Logan) argued against further easing.
• Dove caution: SF Fed’s Daly flagged falling labor demand and warned against smothering a potential productivity upswing.

The macro setup

• Inflation: Last official read (Aug) core near 2.9% y/y, re-accelerating on short-term annualized measures; non-housing services firmed.
• Labor: Average monthly payroll gains slid (168k in 2024 to ~29k through Aug). Debate centers on demand weakness vs. supply constraints from lower immigration.
• Policy question: Is the current range still restrictive? Hawks say near neutral after 50 bp of cuts; doves say restrictive enough to risk labor damage.

Scenarios for December 9–10

1. Hold (base-case coin-flip): Pause to regain data clarity; emphasize inflation vigilance.
2. Cut 25 bp with guardrails: Deliver the third cut but raise the bar for any follow-ups.
3. Defer to January: Signal optionality; treat meetings as substitutable pending data.

Market implications

• Rates/FX: A pause supports front-end yields and the dollar; a cut flattens the curve and pressures the dollar.
• Risk assets: A hawkish hold risks near-term equity volatility; a conditional cut is supportive but capped by tighter guidance.
• Path dependency: Tariff pass-through and services inflation prints will dominate the reaction function into Q1.

What to watch next

• Re-starting CPI/PCE and payrolls before the meeting.
• Updated FOMC statement tone on “balance of risks” and any tweak to “extent of additional policy firming” language.
• Powell’s presser cues on neutral-rate assessment and how much weight he gives to tariff dynamics vs. labor softness.