Payne Capital Management President Ryan Payne discusses whether the Federal Reserve should lower interest rates in December on Varney & Co.
Federal Reserve policymakers are expected to cut interest rates at this week’s meeting despite inflation remaining above their target amid concerns about a softening labor market.
The Federal Open Market Committee (FOMC), the central bank’s monetary policy-setting committee, will announce its interest rate decision on Wednesday. Markets widely expect a 25-basis-point interest rate cut, which would mark the third straight meeting with a rate cut – though expectations have shifted over time.
Minutes from the FOMC’s last meeting showed deep divides among policymakers over whether a rate cut would be appropriate in December as they look to gradually bring interest rates to a neutral level, with some expressing concerns about the impact that cutting rates at this time could have on inflation.
The market’s expectations for a rate cut at this week’s meeting have shifted wildly amid those concerns and disruptions in the release of economic data. The CME FedWatch tool showed a 30% probability of a rate cut on Nov. 19, down from 98% a month before, as skepticism prevailed. Those odds have rebounded to 87% as of Dec. 5 amid soft labor market data.
FED’S FAVORED INFLATION GAUGE SHOWS CONSUMER PRICES REMAINED ELEVATED IN SEPTEMBER
Federal Reserve Chair Jerome Powell and central bank policymakers are set to announce their latest interest rate decision on Wednesday. (Justin Sullivan/Getty Images / Getty Images)
A report from global outplacement firm Challenger, Gray & Christmas found that layoffs announced in 2025 through the month of November totaled 1,170,821 cuts – the highest level for a comparable period since 2020, when there were 2,227,725 cuts announced amid the COVID-19 pandemic.
ADP’s jobs report showed the private sector unexpectedly lost 32,000 jobs in November, with 120,000 job losses among small businesses outpacing the modest gains by larger firms.
The weak labor market data comes as the Fed’s preferred inflation gauge, the personal consumption expenditures (PCE) index, remained elevated at 2.8% for headline PCE and 2.9% for core PCE in September, which is the most recent data release for the metric due to the effects of the government shutdown on data collection.
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Gregory Daco, chief economist at EY-Parthenon, said in a note that policymakers are confronted with three questions entering this meeting: how persistent will tariff-driven inflation be, how weak is the labor market, and how close is monetary policy to neutral.
Daco said that tariff-induced inflation “remains a thorny issue in a new economic paradigm defined by overlapping supply shocks from trade policy and tariffs to demographic shifts, immigration swings, and an emerging technological revolution in AI.”
He noted that the firm projects core PCE inflation will rise to about 3.2% in early 2026 before declining to around 2.3% by the end of next year. Daco added that assessing the labor market is difficult, given sharply lower immigration and an aging population, though he pointed to signs of weakness.
“Most indicators now point to a soft labor market after two years of deterioration illustrated by the rise in unemployment, a hiring rate at its lowest level in a decade, increasing continuing claims, elevated layoff announcements, and job cuts among small businesses,” Daco wrote.
FED PRESIDENT EXPLAINS VOTE AGAINST INTEREST RATE CUT
Michael Feroli, chief U.S. economist at JPMorgan, said in a note that heading into the policy meeting there are “almost equally compelling reasons to cut and to hold” and that the ultimate decision will come down to vote-counting.
“Most governors appear to favor cutting, and most reserve bank presidents appear to favor holding. The most decisive news to tilt the balance was NY Fed President Williams’ remarks two weeks ago that there is room for another cut ‘in the near term,'” Feroli wrote.
He added that there may be a “hawkish” tone that accompanies a cut announcement by hinting that the Fed could pause rate cuts at the January policy meeting.
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Feroli noted that the firm is anticipating at least two dissents in favor of no rate cut as well as one in favor of a larger rate cut.