This week, Federal Reserve Chairman Jerome Powell and other key Fed officials have been making a series of public remarks, most of which convey a hawkish stance on U.Smonetary policyDespite some signs of easing inflationary pressures, many policymakers have emphasized that there is no immediate need for rate cutsPowell himself stressed the need for caution when it comes to lowering interest rates, signaling that the central bank will take a careful and measured approach.

Economists and financial institutions have been weighing in on the situation, noting that while some factors driving inflation, such as an overheated labor market, continue to subside, new obstacles are emerging that may make it harder for inflation to fall in the near futureThese include the potential impact of new tariffs and trade policies, which could exacerbate inflationary pressuresAs for whether the Federal Reserve will reduce rates in December, there is no consensus in the market

Most institutions believe the Fed will cut rates by 25 basis points, but opinions vary on the pace of future rate cutsSome analysts even suggest that the Fed might pause rate cuts entirely.

Hawkish Tone from Fed Officials

The past week saw a flurry of public comments from Federal Reserve officials, with many of them signaling a cautious approach to further rate cutsOn December 3, Mary Daly, President of the San Francisco Federal Reserve, stated that there is currently no urgency to lower ratesShe emphasized that policymakers have the ability to "carefully adjust" the U.Smonetary policy as needed.

The following day, Jerome Powell reinforced this cautious sentiment, noting that the U.Seconomy is in a good position and is expected to remain so, which makes policymakers more hesitant about lowering interest rates furtherPowell's comments came alongside remarks from St

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Louis Fed President James Bullard, who suggested that pausing rate cuts as soon as this month might be appropriate.

In contrast to Powell and Daly’s caution, Federal Reserve Governor Christopher Waller expressed stronger support for a rate cut in DecemberOn December 2, Waller raised the question of whether the Fed should cut rates or skip the move entirely and answered affirmatively, stating that he was inclined to support a reduction in the policy rate during the upcoming meetingWaller pointed out that he would continue to monitor incoming data to guide his decisionHowever, he also cautioned that if there is a consensus among policymakers on the target rate range for the end of next year, the Federal Open Market Committee (FOMC) might skip rate cuts multiple times in the process.

Inflationary Pressures Could Resurge Next Year

One of the main reasons behind the hawkish stance from Federal Reserve officials may be the expectation of renewed inflationary pressures in 2024. Analysts are concerned that inflation, which has been subdued in recent months, could rise again, posing a challenge for the Fed's efforts to bring it down.

For instance, Sara House, Managing Director and Senior Economist at Wells Fargo, indicated that the U.S

inflation data for November could show a halt in the progress made against inflationHouse predicted that the year-on-year U.SConsumer Price Index (CPI) for November would rise slightly from 2.6% to 2.7%. The core CPI, which excludes volatile food and energy prices, is expected to remain in the narrow range of 3.2%-3.3% for the sixth consecutive month.

Despite some easing in inflationary pressures due to factors like the cooling labor market, House pointed out that new forces are emerging that could hinder further reductions in inflationNotably, she highlighted the risk of new tariffs being implemented, which could push prices higher and complicate the Fed's efforts to combat inflation.

Moh Yong, Chief Economist and Head of Market Strategy at Kolbridge Financial, noted that inflation swap contracts for one-year and two-year horizons have risen by 40-45 basis points since the end of September

This suggests that markets are expecting inflation to increase by 0.4%-0.45% over the next one to two yearsIf the U.Sgovernment implements new tariff plans, Moh forecasted that inflation could increase by 0.7%-0.9% by 2025.

Additionally, the Federal Reserve's December 4th release of its final Beige Book for the year noted that price growth remains moderate across various regionsHowever, some regions have expressed concern that potential tariffs on imported goods could pose a significant risk to inflation in the future.

December Rate Cut Uncertainty

The next meeting of the Federal Open Market Committee (FOMC) is scheduled for December 17-18, marking the final meeting of the yearThe question of whether the Fed will cut rates in December remains uncertain, with differing opinions in the marketHowever, most institutions agree that the pace of rate cuts will slow down going forward.

According to the CME Group’s FedWatch Tool, the probability of the Fed maintaining its current interest rate in December stands at 29.9%, while the probability of a 25-basis-point rate cut is 70.1%. Looking ahead to January, the probability of the Fed holding rates steady is 21.6%, while the likelihood of a 25-basis-point cut is 58.9%.

Citigroup’s recent report suggested that market expectations are divided between a 25-basis-point rate cut and a pause in the rate-cutting cycle

However, the bank noted that the threshold for a rate pause is high, and that a pause would require the creation of more than 300,000 new jobs in November and a significant overshoot in core inflation for that month.

Fitch Ratings, in its latest report, pointed out that inflation risks in the U.Shave risen due to resilient consumer spending and the upcoming tariff increasesThe agency expects the Fed to gradually cut rates to a neutral level over the course of 2024, but forecasts that the Fed will not reduce rates further in 2026.

Matthew Luzetti, Chief U.SEconomist at Deutsche Bank, predicts that the Fed is likely to cut rates by 25 basis points in December, after which the central bank will keep rates unchanged for the entirety of 2025. He cited tax cuts boosting growth and expenditure, coupled with protectionist trade policies, as factors that would keep inflation above the 2.5% target.

Jean Boivin, Head of BlackRock’s Investment Institute, stated that the persistence of U.S

inflation is forcing the Fed to reconsider further rate cuts in 2025. He said that inflation “stickiness” might compel the Fed to pause its rate-cutting cycle, especially if inflation remains above the target.

Conclusion

As the U.Seconomy continues to navigate the challenges posed by inflation, labor market dynamics, and potential new trade policies, the Federal Reserve faces a difficult balancing act in determining its next stepsWhile some officials advocate for caution and the gradual reduction of rates, others see a need for more immediate actionThe debate over the December meeting highlights the uncertainties and complexities of navigating a post-pandemic economyWith inflationary pressures potentially rising again next year, the Fed’s decisions will be critical in shaping the trajectory of U.Smonetary policy for the coming yearsFor investors, businesses, and consumers alike, the outcome of these discussions will have far-reaching implications for economic growth, financial markets, and overall stability.