In a classic case of reading the tea leaves, the Federal Reserve is heading into its December FOMC meeting sharply divided over whether to cut interest rates, with the cooling labour market increasingly emerging as the “bigger deal” for policymakers. The public split has injected significant volatility into market expectations, with rate-cut probabilities swinging widely based on incoming data and official commentary.

One camp, leaning dovish, argues that lowering rates next month is necessary to support a job market showing signs of weakening, citing the unemployment rate rising to 4.4%, its highest since October 2021. New York Fed President John Williams and Governor Christopher Waller have championed this view, with Waller stating his focus is squarely on weakening job conditions to justify a December cut. Williams acknowledged that inflation has temporarily exceeded the 2% target but stressed the equal importance of avoiding “undue risks to our maximum employment goal.”

Conversely, the hawkish camp, including Governor Michael Barr and Cleveland Fed President Beth Hammack, cautions that inflation remains uncomfortably close to 3% and has been above target for over four years. They argue that lowering rates to support the labor market risks prolonging elevated inflation and encouraging financial risk-taking. Chicago Fed President Austan Goolsbee also expressed unease that progress toward the 2% inflation goal “seems to have stalled out.”

The recent influx of delayed economic data, including a September jobs report that was interpreted differently by both sides, has only given both camps more arguments, creating a “perfect Rorschach test” for policymakers. With the official October jobs and inflation reports canceled and the November data arriving after the December meeting, the Fed’s picture remains incomplete.

As TD Securities’ Jayati Bharadwaj suggests, the labor market has become the priority. Despite the uncertainty, the current consensus leans toward a “dovish hold” in December, maintaining rates while signaling future cuts in 2026, as policymakers grapple with balancing the dual mandate of price stability and maximum employment

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Source: https://finance.yahoo.com/video/labor-market-bigger-deal-fed-110004213.html