Will Labor Softness Prompt a December Rate Cut?

At its October 29 meeting, the Federal Reserve cut the benchmark Fed Funds Rate by 25 basis points to a range of 3.75%-4%, marking a second consecutive cut. The move was widely expected as the Fed attempts to balance above target inflation with a cooling labor market.

After the meeting, Chair Jerome Powell cautioned that there is “no risk-free path” ahead and stressed that another cut on December 10 “is not a foregone conclusion.”

Growing Divide Inside the Fed

Several Fed officials have recently expressed concern that inflation progress may stall, arguing the Fed should pause in December. This includes Boston Fed President Susan Collins, St. Louis Fed President Alberto Musalem, and Kansas City Fed President Jeffrey Schmid, who also dissented in October. Non-voting members such as Atlanta Fed President Raphael Bostic, Dallas Fed President Lorie Logan, and Cleveland Fed President Beth Hammack have voiced similar caution.

Waller’s Case for a December Cut

Fed Governor Christopher Waller, however, laid out a clear case for why a December cut remains necessary. He noted that inflation continues to trend toward 2%, especially when adjusting for tariff-related effects, and that the labor market has weakened significantly and is at risk of stalling.

Some Fed officials argue that slower job growth reflects a greater decline in labor supply than demand. Waller pushed back, noting that if labor supply were the main issue, we would be seeing rising wages, more job openings, and higher quit rates – none of which the data supports.

Instead, Waller emphasized that labor demand is falling faster than labor supply. Hiring has slowed, wage growth has softened, job vacancies have declined, and quit rates have dropped.

Waller’s bottom-line message was straightforward: He believes the labor market has been weakening for months, and he doesn’t expect upcoming data to alter his view that another rate cut is warranted. In his assessment, current policy is putting pressure on the broader economy – particularly on lower- and middle-income households – and a December cut would help prevent further deterioration in labor conditions.

Signs of Labor Market Weakness

Recent data continues to reinforce Waller’s concern. Private-sector job growth has nearly stalled, with just 10,000 jobs added over the past three months, according to ADP. WARN notices – legally required alerts that companies must file before certain large-scale layoffs – climbed to 39,000 in October, the highest monthly level since 2009 excluding the Covid period.

Long-term unemployment has also increased, with nearly 26% of unemployed workers out of work for six months or more, one of the highest shares in a decade outside the pandemic.

Challenger reported that job cuts surged to 153,074 in October, the highest October total in more than 20 years. Meanwhile, planned hiring is down 35% year over year, marking the weakest year-to-date pace since 2011.

Looking Ahead

Whether the Fed cuts again in December will largely hinge on how much additional labor and inflation data becomes available – and what those reports show. If signs of labor-market weakness continue to mount, Waller’s argument for another rate cut may gain momentum. But if inflation proves sticky or key reports are delayed, the Fed may choose to pause.

In short, the path to December remains wide open, and every data release between now and then will matter.

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By Shelly Williams

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