Washington: The US Federal Reserve is preparing for its final monetary policy meeting of the year next week, facing limited data due to a recent government shutdown. Despite differences among officials, there is increasing anticipation of a 25 basis point rate cut.
According to Anadolu Agency, the Federal Open Market Committee (FOMC) will determine the future of the policy rate at its meeting on December 9-10, following an earlier 25 basis point reduction in October. The decision comes amid data disruptions caused by the longest government shutdown in US history, which concluded on November 12. As a result, critical economic indicators such as the October employment report and inflation data were not published.
During this period, delayed September data from official bodies and alternative data from private sources have been closely examined. These mixed signals about the labor market have heightened concerns about weakening employment.
Recent figures from the US Department of Labor showed non-farm employment increased by 119,000 in September, surpassing expectations, although the unemployment rate climbed slightly from 4.3% to 4.4%. Unemployment claims reached their lowest point since September 2022, with first-time claims dropping to 191,000 for the week ending November 29. Conversely, private sector employment fell by 32,000 in November, as reported by the ADP Research Institute, marking the largest decline since March 2023. Moreover, Challenger, Gray and Christmas reported a 24% year-on-year rise in layoffs, reaching 71,321 in November, although monthly figures showed a decrease.
In terms of inflation, the reopening of the government provided limited data. The US Producer Price Index (PPI) rose by 0.3% monthly and 2.7% annually in September, aligning with expectations. The core personal consumption expenditure price index, excluding food and energy, increased by 0.2% month-on-month and 2.8% year-on-year in September, slightly below the anticipated annual rise of 2.9%. Meanwhile, consumer confidence, as measured by the University of Michigan, improved for the first time in five months, with short-term inflation expectations dropping to their lowest level since January.
The Federal Reserve remains divided between hawkish officials, who oppose rate cuts to combat inflation, and dovish members advocating for cuts due to a weakening labor market. The October meeting minutes revealed a split among officials, with some favoring more significant cuts while others preferred maintaining rates. Following Fed Chair Jerome Powell’s remarks indicating uncertainty about a December rate cut, the market began to anticipate a possibility of unchanged rates.
Olu Sonola, head of US economic research at Fitch Ratings, noted that recent personal consumption expenditure data showed moderate inflation and solid consumer spending, supporting a potential rate cut in light of a weakening labor market. Padhraic Garvey of ING highlighted resilience in certain economic sectors despite labor market pressures, noting a 95% probability of a rate cut. Steven Kamin of the American Enterprise Institute pointed to a murky employment picture as justification for another rate cut.