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Federal Reserve Rate Cut Bets Diminish as Inflation Concerns Persist
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The likelihood of a third consecutive interest rate cut by the US Federal Reserve in December is rapidly fading,as policymakers signal growing concern that inflation remains stubbornly high.Market expectations for a quarter-point reduction have plummeted from nearly 70% to 40% in the past week, following statements from several members of the rate-setting Federal Open Market Committee (FOMC). This shift in sentiment has already triggered a sell-off in equities and a rise in two-year Treasury yields,reflecting investor anxiety surrounding valuations,notably in the artificial intelligence sector.
A Divided Committee and Shifting Expectations
The Fed has implemented quarter-point cuts at its previous two policy meetings, responding to signs of a cooling labor market and a lessening impact from President Trump’s tariffs on inflation. However, the October vote revealed a significant internal divide.One analyst noted, “It is unfeasible to know which way this goes,” regarding the December decision.
The october meeting resulted in a rare three-way split. A Fed governor and ally of the former president advocated for a more aggressive half-point cut, while the president of the Kansas City Fed favored maintaining current rates. Following the vote, Fed Chair Jay Powell cautioned that a December cut was not guaranteed, and several regional Fed officials echoed similar reservations about the previous month’s decision.
December Vote Poised for Contention
Economists predict a contentious December meeting. According to one economist at Barclays, the outcome is “shaping up to be just as contentious as Powell portrayed in October’s press conference.” A regional Fed president signaled on Friday a continued preference for maintaining the benchmark rate within a 3.75-4% range, citing a lack of compelling evidence that rates are currently to high.
Similarly, the head of the Boston Fed suggested earlier in the week that maintaining current policy rates “would likely be appropriate for some time.” Even a policymaker who does not currently have a vote on the committee has shifted their stance, now leaning towards a December hold.
Services Sector Inflation Remains a Key Obstacle
The reluctance to aggressively cut rates stems from persistent inflation, particularly within the services sector.A chief US economist at KPMG stated, “What we’ve really seen is that there is a lot of reticence to cutting aggressively given all of the unknowns out there,” adding, “There is also some inflation coming from the services sector that has just not been eradicated.”
While the consumer price index rose 3% year-on-year in September – lower than anticipated – it still exceeds the Fed’s 2% inflation target. The Bureau of Labor Statistics is scheduled to release the September jobs report next Thursday, but the availability of October data on inflation and the labor market remains uncertain.
Potential for Historic Dissent
The minutes from the October vote, scheduled for release on Wednesday, are expected to shed further light on the divisions within the FOMC. Irrespective of whether the central bank implements a cut before year-end, analysts anticipate a delicate balancing act for the Fed chair to minimize dissenting voices.
A senior official warned that, “Absent miraculous clarification from limited data, Powell is in a rough spot.” Dissenting voices – including Chris Waller,Michelle Bowman,and Stephen Miran,all appointed by the former president – are likely to oppose any decision to hold rates steady,perhaps leading to three governors dissenting for the first time since 1988.
