Traders Say a December Rate Cut Is Coming. The Fed Isn’t so Sure

Traders seem confident that another interest rate cut is coming. The same certainly can’t be said for the people who will actually decide. 

Ahead of the Federal Open Market Committee’s meeting on Wednesday, the CME Group’s FedWatch tool placed the odds of a quarter-point cut at 87% as of Friday morning. But that belies just how hard a job the Fed has with such a hazy economic picture: While some data points to a weakening job market and an overall slowdown in the economy, others point to growth. 

Divided Decision-Makers 

Committee members cannot get on the same page. Minutes from the panel’s October meeting showed that while the FOMC did eventually choose to cut rates, there was division among the members that extended to its December outlook. Over the past year or so, Fed officials’ recommendations for where interest rates should head next have diverged more than at any point since 2012, according to Bloomberg. 

The shutdown didn’t help, with many government data releases delayed or cancelled. The Bureau of Labor Statistics’ November jobs report won’t come out until after the Fed’s upcoming decision, and the government is forgoing the October release completely. The central bank’s preferred inflation gauge, the core personal consumption expenditures price index, was released Friday, but that data was from all the way back in September. 

That lack of data may actually be good news for investors betting on a rate cut: 

• “Investors have essentially been handed a rare quiet zone heading into the Fed meeting,” says Matthew Smart, director of financial planning and portfolio analysis at WWM Investment. The shutdown-driven data gap means no single figure can upend the market’s base case for a cut, so the story of cooling jobs and easing inflation holds steady, he adds. 
• The few data releases mean “traders enjoy a clear runway to maintain dovish positioning,” says Thomas Urano, co-chief investment officer at Sage Advisory. 

Powell’s Successor: President Donald Trump may be waiting until early next year to officially announce his nominee for the next head of the Fed, but he’s dropping hints. He recently praised National Economic Council Director Kevin Hassett, who was already seen as the frontrunner.