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

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,

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.

, 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.

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.

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

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.

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