Fed Faces December Decision: Easing Labor Market Pressures or Tightening Inflation

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Fed Faces December Decision: Easing Labor Market Pressures or Tightening Inflation

Bitget-RWA2025/11/18 18:04

By:Bitget-RWA

- The Fed faces a December rate cut decision amid internal divisions, with a 50% chance of easing as labor market weakness clashes with inflation risks. - Governor Waller advocates for a 25-basis-point cut to support the slowing jobs market, contrasting with cautious officials like Collins and Jefferson. - Liquidity imbalances push the effective funds rate near the 3.90% excess reserves rate, prompting Treasury bill purchases to stabilize reserves and rates. - Market expectations remain calm, pricing in gr

The Federal Reserve is approaching a crucial decision in December, with odds of a rate reduction standing at 50% as internal disagreements and market forces intersect. The central bank is currently contending with liquidity mismatches that have brought the effective federal funds rate nearly in line with the rate paid on excess reserves, raising alarms about inconsistent monetary conditions. Meanwhile,

Fed Governor Christopher Waller has become a prominent proponent

of loosening policy to bolster a softening job market, though some colleagues warn against acting too soon.

Recent events underscore the Fed’s ongoing difficulties in handling short-term liquidity. The effective funds rate has climbed to just 2 basis points below the 3.90% excess reserves rate, a result of tightening in the repo market. The Secured Overnight Financing Rate (SOFR) has reached 4%, drawing liquidity away from excess reserves and putting upward pressure on the effective funds rate.

Although the Fed has standing repo facilities available to provide liquidity

, demand has been subdued, adding to the central bank’s frustration. In response, the Fed has indicated it will begin purchasing Treasury bills on December 1 to boost bank reserves and help steady the funds rate. Still, some analysts argue this is a blunt instrument compared to possible changes to the Supplementary Liquidity Ratio, which could enable major banks to allocate more capital.

The discussion around a potential December rate cut has grown more heated as policymakers balance concerns about a weakening labor market with ongoing inflation risks.

Waller, appointed during the Trump administration, stated in London

that a further 25-basis-point reduction is justified to counteract a slowing employment sector, stressing that inflation expectations remain stable. He downplayed worries about a government shutdown affecting data, noting that private-sector reports are adequate for guiding policy. His view differs from more cautious voices such as Boston Fed President Susan Collins, who has set a "high threshold" for additional easing, and Vice Chair Philip Jefferson, who prefers a gradual approach.

Fed Faces December Decision: Easing Labor Market Pressures or Tightening Inflation image 0

The Federal Open Market Committee’s meeting on December 9-10 will

reveal whether the Fed chooses to emphasize labor market support

or continues to focus on fighting inflation, given ongoing 3% price increases and uncertainty from tariffs.

Bond investors remain calm, with the 10-year Treasury yield holding above 4.1% even after Chair Jerome Powell expressed doubts about a December rate cut. Markets seem to anticipate a slow pace of rate reductions regardless of the immediate decision, reflecting faith in the Fed’s broader easing path.

The 2-year yield, by contrast, has barely reacted

to short-term policy signals, highlighting market expectations that rates will settle near 3% by 2026.

Disclaimer: The content of this article solely reflects the author's opinion and does not represent the platform in any capacity. This article is not intended to serve as a reference for making investment decisions.

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