Fed's Potential December Rate Reduction Depends on Inflation and Labor Market Dynamics

The Federal Reserve is about to begin its pre-meeting blackout period ahead of the December policy session, as traders and analysts continue to anticipate a rate reduction despite internal disagreements and mixed economic indicators. Recent events—including updated projections from leading financial firms and significant statements from Fed officials—have strengthened the view that the central bank will lower interest rates before the year concludes.

The minutes from the Fed’s October meeting,

, showed what the Wall Street Journal described as a “sharp divide” among policymakers over the December decision. Some members voiced concerns about inflation, while others pointed to the gradual cooling of the labor market and a still-restrictive policy stance as reasons to support a cut. This internal split reflects the broader debate within the Fed, as officials weigh ongoing inflation risks against evidence of economic durability.

Morgan Stanley, which recently changed its position on a December rate reduction,

in its updated forecast. The firm now expects the first rate cut in January 2026, with additional reductions in April and June. This adjustment highlights the Fed’s shifting approach, as robust employment gains—such as the 119,000 jobs added in September—have made a swift easing less certain. Still, Morgan Stanley’s analysis emphasizes the ongoing uncertainty about the Fed’s next moves, with markets last week assigning about a 73% chance to a December cut.

The most significant boost to market optimism came from New York Fed President John Williams, who last week signaled a willingness to consider further rate decreases. “I see monetary policy as somewhat restrictive... So I believe there’s still potential for another adjustment soon,” Williams remarked,

. His comments, made at a Central Bank of Chile event, led traders to increase bets on a December cut, with futures markets indicating nearly a 60% likelihood of a 25-basis-point reduction. As a key Fed leader and permanent voting member of the Federal Open Market Committee, Williams’ statements are highly influential, about when to start easing policy.

The Fed’s top leadership—including Chair Jerome Powell and Vice Chair Philip Jefferson—has yet to provide a clear signal about December, fueling speculation about possible dissenting votes. Some regional Fed presidents, such as Susan Collins of Boston and Lorie Logan of Dallas, have argued for keeping rates steady until inflation more clearly approaches the 2% goal,

. However, Williams’ openness to near-term action has increased market confidence that the Fed will weigh growth concerns alongside its inflation objectives.

This ongoing debate highlights broader economic challenges. Although inflation remains above the target—September’s CPI was 3% and PCE stood at 2.8%—Fed officials have noted that price pressures could ease as the effects of tariffs diminish,

. At the same time, the labor market, while showing some signs of slowing (such as a 4.4% unemployment rate in September), is still strong enough to support cautious optimism for a “soft landing.” This situation leaves the Fed carefully balancing the risks of moving too soon with the dangers of keeping policy too tight for too long.

As the December meeting draws near, investors will be watching closely for signals in the Fed’s statement and press conference. A rate cut would be consistent with the central bank’s history of responding to changing data, but any surprise could spark market volatility. For now, the combination of strong institutional forecasts, influential official remarks, and continued economic strength has made December a pivotal moment for Fed policy.