Fed Faces Dilemma: Balancing Inflation Management and a Slowing Labor Market in December Choice

According to a Reuters survey of 84 out of 105 economists, the U.S. Federal Reserve is expected to lower interest rates by 25 basis points in December, a slight increase in consensus compared to last month

. If implemented, this would be the third rate cut in a row, adjusting the federal funds rate to between 3.50% and 3.75%. Still, disagreements within the Federal Open Market Committee (FOMC) and the lack of reliable economic data due to the government shutdown have added unpredictability to the outlook .

The outcome will largely depend on labor market conditions, which have recently shown some weakness. Private data, such as ADP’s latest figures indicating an average of 11,250 jobs lost weekly in late October, have heightened worries about a softening job market

. With official Bureau of Labor Statistics (BLS) numbers still unavailable because of the shutdown, the Senate has passed a temporary funding measure to keep the government running until January 30, 2026, helping to bridge the immediate data gap . Nonetheless, experts caution that the Fed’s dual mandate—managing inflation and supporting employment—remains challenging. The Fed’s preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, has stayed above the 2% goal for more than four years, making further rate cuts more complicated .

Investor confidence in a December rate cut has declined somewhat, with the likelihood now at 63%, down from 92% a month earlier

. This change reflects both cautious optimism about the labor market’s durability and ongoing worries about inflation driven by tariffs and supply chain issues . Fed Chair Jerome Powell has stressed a cautious approach, stating that more economic data is needed before making a final decision on rate reductions . At the same time, steady corporate earnings and hopes for a resolution to the government shutdown have temporarily supported riskier assets, including , which has remained stable around $103,000 .

The future direction is still unclear. Nearly half of the economists polled anticipate the federal funds rate will fall to between 3.25% and 3.50% by the next quarter, but there is no agreement on where rates will stand by the end of 2026

. Some FOMC members, including newcomer Stephen Miran, have pushed for deeper cuts, while more hawkish officials like St. Louis Fed President Alberto Musalem warn against overly loose policy . The Fed faces the task of steering through a delicate economic landscape, with growth expected to slow to 1.0% this quarter before leveling off at 1.8% annually through 2027 .

As the December meeting draws near, investors will be watching closely to see if Powell can bring unity to the FOMC amid differing opinions. Any delays in resolving the government shutdown or unexpected jumps in inflation could further complicate the outlook, but for now, a December rate cut appears to be the most probable outcome

.