Fed Faces December Challenge: Navigating Job Market and Inflation as Data Lags

The likelihood that the Federal Reserve will lower interest rates by 25 basis points in December has soared to 82.7%, fueled by changing statements from influential officials and shifting economic indicators. This represents a sharp turnaround from previous doubts, with market participants now almost certain that borrowing costs will be reduced as the central bank considers its goals of price stability and full employment

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The outcome depends on a complicated mix of elements. John Williams, President of the New York Fed and a key figure in the discussion, remarked during a conference in Chile that the Fed has "space" to further ease monetary policy. He stressed that keeping inflation in check is still the main priority, while also recognizing that the job market requires some adjustment. "I see monetary policy as still somewhat restrictive, though less so than before our latest measures," Williams commented, highlighting the careful balance between controlling inflation and supporting employment

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The Fed’s decision-making is further complicated by the postponement of key economic reports. The Bureau of Labor Statistics canceled the October jobs and inflation releases and delayed November’s data until after the December 9-10 policy meeting, forcing officials to rely on private sources and anecdotal information

. Michael Gregory, BMO Capital’s deputy chief economist, pointed out that this creates a "more uncertain" environment, as policymakers must gauge October and November labor trends from partial data like ADP payrolls and the Beige Book.

The much-anticipated September employment report, published last week, added more uncertainty. Although the headline number of 119,000 new jobs surpassed forecasts, revisions to earlier months showed downward changes—August had 4,000 fewer jobs and July 7,000 fewer. The unemployment rate rose to 4.4%, and wage increases appeared to be slowing

. Michael Feroli of JPMorgan called the Fed’s decision a "very close call," suggesting the central bank may skip a December cut but could resume easing in early 2026.

Market sentiment, as tracked by the CME FedWatch tool, has been highly volatile. The odds of a rate cut jumped from 39% to 73% after Williams’ remarks, then settled around 82.7% as traders digested new information. Pagaya’s research pointed to rising confidence, noting that chances for a January cut are at 83% and could climb to 91% by March

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There are still disagreements within the Federal Open Market Committee. While "several" members support a December cut, "many" believe no further moves are needed this year, according to the November meeting minutes. Fed Governor Christopher Waller supported the use of alternative data, arguing that "proxy indicators" such as weaker labor conditions and steady inflation expectations support the case for a cut

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With the Fed’s decision coming down to a narrow margin, investors are increasingly anxious. The delay in official data and mixed messages from policymakers have heightened uncertainty, making the December meeting a crucial test of the central bank’s ability to steer through a volatile economic environment.