Fed to cut rates again in December on weakening job market, say most economists: Reuters poll

A Reuters poll indicates that 80% of economists anticipate the U.S. Federal Reserve will implement a third consecutive 25 basis point interest rate cut in December, lowering the target range to 3.50%-3.75%, primarily to underpin a weakening labor market. This expectation, however, contrasts with internal FOMC disagreement and Chair Powell's cautious stance, while persistent inflation, with the PCE index remaining above the 2% target for over four years, complicates the Fed's dual mandate and future policy outlook.

Analysis

80% of economists polled by Reuters anticipate a 25 basis point Federal Reserve rate cut in December, which would be the third consecutive reduction, setting the fed funds rate target at 3.50%-3.75%. This consensus, reflecting current market pricing, is primarily predicated on underpinning a perceived weakening labor market. However, this outlook contrasts with clear disagreement among FOMC members and Chair Powell's previous warning against assuming a December cut.

The labor market presents mixed signals; while private data indicates recent job shedding, nearly 70% of economists believe job growth has remained stable since the government shutdown, with the unemployment rate projected to rise only slightly to 4.5% next year from August's 4.3%. This nuanced view suggests the labor market is cooling rather than collapsing, introducing risk to the December cut if data dispels the sense of weakness.

Persistent inflationary pressures further complicate the Fed's policy trajectory, with the Personal Consumption Expenditures (PCE) index remaining above its 2% target for over four years and expected to continue through 2027. This prolonged inflation, coupled with a projected economic slowdown to 1.0% this quarter from 2.9% last quarter, highlights a growing tension within the Fed's dual mandate and potential challenges to its credibility.

Key Decisions for Investors

• Investors should closely monitor upcoming labor market data and official Fed communications for any shifts in tone or policy direction, given the internal FOMC disagreement and mixed economic signals.
• Consider the implications of persistent inflation above the Fed's target through 2027, which could constrain future monetary policy flexibility despite near-term rate cut expectations.
• Evaluate portfolio positioning for potential volatility stemming from the uncertain economic outlook, particularly the projected slowdown in Q4 growth and the ongoing tension between the Fed's dual mandate objectives.