A December Rate Cut? Economists Still Expect One. Markets, Not so Much

Heads, we slow inflation; tails, we stoke employment.

With the record-long government shutdown over, it remains unlikely that Federal Reserve officials will have full access to the backlog of economic data at their next policy meeting in early December. Consequently, the odds for a rate cut at that meeting have plummeted on prediction markets. Economists, meanwhile, are still projecting a 25 basis-point cut. And markets? They seem to be following the masses, not the experts.

Fed Up

Fed Chair Jerome Powell just can’t catch a break. At October’s Federal Open Market Committee meeting, Powell faced dissent on both sides, with some fellow central bankers wanting to maintain rates and others calling for an aggressive 50 basis-point cut. Ultimately, the Fed split the difference, cutting rates by a quarter point. This time, the central bank will be flying partially blind. Previously, the question was when missing government data would be available. Now it’s looking more like a question of if. 

On Wednesday, the White House said that crucial jobs and consumer price index figures for October are now unlikely to be released at all. Economists are urging the Bureau of Labor Statistics to skip ahead to November, as it’s the more relevant data for the Fed’s December 9-10 meeting anyhow. When addressing the prospect of missing data at a press conference in late October, Powell said, “What do you do when driving in a fog? You slow down.” Yesterday, investors took him at his word:

• Traders are now projecting a roughly 50/50 chance of a quarter-point rate cut in December, according to CME Group’s FedWatch tool, down from a 67% chance just days ago. Predictions markets Kalshi and Polymarket have similarly seen odds collapse to a coin flip, after both showed odds of a cut as high as 90% in late October.
• Economists, on the other hand, are more bullish; 80% of respondents in a Reuters survey published Wednesday predicted a quarter-point cut. The survey, however, was likely conducted before the likelihood of missing data was completely clear.

“The general sense is the labor market still looks relatively weak and that’s one of the key reasons why we think the FOMC will continue to deliver that December cut,” Abigail Watt, US economist at UBS, told Reuters.

Market Price: Increased skepticism over a rate cut could also contribute to a mini market pullback. The S&P 500 dropped 1.6% on Thursday, while the tech-heavy Nasdaq Composite Index fell nearly 2.3% and the Dow Jones Industrial Average slid 1.65%. Translation: Everyone might be heeding Powell’s advice and tapping the brakes.