Federal Reserve May Hold Off On Interest Rate Cut

Just a few weeks ago, a December interest rate cut was viewed as practically a done deal by many economists. Now, with fresh government data showing solid U.S. job growth in September, many forecasters think the Federal Reserve is likely to hold off lowering borrowing costs when policy makers meet next month.

The probability of a Federal Reserve rate cut now stands at 22%, down from a likelihood of 97% as of mid-October, according to economists polled by financial data company FactSet. This significant drop in expectations has led many to believe that the Fed will leave rates unchanged at its next two-day meeting on Dec. 9-10.

Shift in Expectations

The shift in expectations for future Fed rate cuts follows a six-week blackout in federal economic data because of the government shutdown, a hiatus that hindered the central bank’s ability to assess key economic trends. Last month, Fed Chair Jerome Powell cautioned that a December rate cut wasn’t a “foregone conclusion,” pointing to signs that the job market remains on firm ground.

The Fed is more likely to lower its benchmark federal funds rate — or what banks charge each other for short-term loans — if officials conclude that the job market and broader economic growth are in danger of stalling. But Thursday’s jobs data showed that employers continued to hire at a healthy clip in September.

Job Market Defies Expectations

“The labor market continues to defy expectations,” Ellen Zentner, chief economic strategist for Morgan Stanley Wealth Management, said in an email. “Today’s stronger-than-expected jobs data highlighted ongoing U.S. economic resilience in the face of multiple challenges, but it also likely pulled the plug on a rate cut” in December.

The federal funds rate is currently sitting in a range of 3.75% to 4%. A move by the Fed to dial back rate cuts in 2026 could keep borrowing costs for homes and cars elevated. Pricier mortgages and auto loans are also reinforcing the feeling among many Americans, reflected in sentiment polls, that the cost of living remains too high.

Mixed Economic Picture

The Federal Reserve’s so-called dual mandate requires monetary policymakers to keep both inflation and unemployment in check. The central bank cited the slowing labor market when it twice trimmed borrowing costs this fall.

But the latest payroll gains released Thursday showed that employers hired 119,000 people in September — more than double what most economists had forecast. The nation’s unemployment rate ticked up from 4.3% to 4.4%, the highest level since October of 2021. The increase in the jobless rate suggests more people are re-entering the workforce to search for a job, economists said.

At the same time, inflation has edged up, climbing at an annual rate of 3% in September. That puts pressure on the Fed to keep price increases from spiraling higher, with some policymakers expressing concern over persistent inflation.

Complications and Uncertainties

The mixed economic picture is complicated by the absence of more recent official data. The Bureau of Labor Statistics said this week that it will fold some October jobs data into its November report, which is set for release after the Fed’s next meeting, on Dec. 16.

“Given that today’s numbers were not as bad as feared, in conjunction with hawkish statements from the Fed recently, it does appear that the Fed will skip a cut in December,” Preston Caldwell, chief U.S. economist at Morningstar, said in an email.

He added, “But with the negative trend in labor markets remaining in place, we’d expect the Fed to resume cutting in their next meeting in January 2026, if they don’t cut this December.”

Conclusion

In conclusion, the Federal Reserve’s decision on interest rates has become more uncertain due to the latest job growth data. While the labor market continues to defy expectations, the mixed economic picture and complications due to the absence of recent data have led many to believe that the Fed will hold off on an interest rate cut in December. However, the future of interest rates remains uncertain, and the Fed’s next move will depend on various economic factors and data releases.