Strong US data weakens case for December Fed rate cut

As the US has registered strong economic and inflation data. This development continues to shape the debate among Federal Reserve policymakers over the pace and extent of interest rate cuts. Further, investors on November 15, reduced their expectations for a rate reduction at the central bank's upcoming FOMC meeting, according to a detailed report by Reuters.

In the most recent rounds of discussions on the US monetary policy, US central bankers continued to put their faith, that inflation was slowly but surely coming under control and would allow the central bank to lower its benchmark rate over time from the current 4.5 per cent-4.75 per cent range, a level felt to discourage spending and investment, to a more neutral setting, the Reuters report explained further.

Still, how fast the central banks does that, and what level represents "neutral," remain a topic of debate, with Fed Chair Jerome Powell on November 14 stating that the economy's continued strength indicates that the Fed could take its time with the discussion.

The signs of increasing doubts over what a month ago was a normal expectation, for a quick run of cuts into next year. This comes as a major political shift is underway in the US, following Donald Trump's victory in last week's election, with Wall Street trying to capture what it sees as further inflationary pressures rising in the year ahead as the incoming Republican president pushes for tax cuts, higher tariffs and a crackdown on immigration.

Fed officials have been reluctant to say they are taking that into account, but investors already are and market bets on how quickly and how much the Fed will cut rates have ratcheted down over the last week the Reuters report added further. Boston Fed President Susan Collins said she did not see a big urgency to lower rates but did not rule out another rate cut at the Fed's next meeting on Dec. 17-18.

US stocks tanked on November 15, after Federal Reserve Chair Jerome Powell, clearly signalled a slower pace of interest-rate cuts. And while several Fed policymakers appear to be on the fence over another rate cut in December, they have also signalled that skipping a meeting would mean they are going slower on rate cuts rather than stopping altogether.

The policy rate is expected to fall to 2.9 per cent in 2026

These projections also reflected an expectation that the policy rate would fall to 2.9 per cent sometime in 2026. Investors in contracts tied to that rate now see rates staying as much as a percentage point higher than that. The Fed will release fresh forecasts in December when it makes its next rate-setting decision.

Market participants and investors will carefully follow the next decision of the Federal Reserve to make informed investment decisions and to gain clues on the overall strength of the US economy.