• 'Looking to next week, the probability for a Fed rate cut is at 95% - so it's going to happen!': Padhraic Garvey, ING's regional head of research

• 'The risky employment picture and the lack of a more concerted rise in inflation will give the Fed the excuse it needs to cut rates another 25 basis points next week': Steven Kamin, senior fellow at American Enterprise Institute

ISTANBUL

The US Fed heads into next week's final monetary policy meeting of the year with limited data, and despite differences of opinion among officials, expectations of a 25 basis point rate cut are coming to the fore.

The Federal Open Market Committee (FOMC) will decide on the course of the policy rate at its final meeting of the year on Dec. 9-10, following its 25 basis point cut in October.

Fed officials will make their monetary policy decision next week with limited data due to disruptions caused by the US government shutdown.

After the longest government shutdown in US history ended on Nov. 12, institutions updated their data calendars, but critical data such as the October employment report and inflation could not be published because some data could not be collected during the shutdown.

In this period, data for September, which was released late by official agencies, and alternative data published by private organizations was closely monitored.

Although the available data posted mixed signals about the labor market, the latest alternative indicators increased concerns about weakening employment.

Unemployment side

According to data from the US Department of Labor, non-farm employment in the US increased by 119,000 in September, exceeding expectations, while the unemployment rate rose from 4.3% to 4.4%.

Data released by the department this week also showed that the number of people filing for unemployment benefits for the first time in the week ending November 29 fell to 191,000.

Unemployment claims hit their lowest level since September 2022.

Meanwhile, this week's data by the ADP Research Institute showed that private sector employment in the country fell by 32,000 in November, contrary to expectations of an increase. This was the largest decline in private sector employment since March 2023.

Data by consulting firm Challenger, Gray & Christmas also showed that the number of layoffs announced by US-based employers rose to 71,321 in November, a 24% increase year-on-year, despite declining compared to the previous month.

Layoffs rose 54% in the first 11 months of the year compared to the same period last year, reaching 1.170 million, or 1,170,821 to be exact.

Inflation indicators in line with expectations

Since the US government reopened, less data is available regarding the inflation outlook.

The US Producer Price Index (PPI) rose 0.3% on a monthly basis and 2.7% on an annual basis in September, in line with expectations.

The core personal consumption expenditure price index, which excludes food and energy items considered by the Fed as inflation indicators, rose 0.2% month-on-month and 2.8% year-on-year in September.

The index, which rose in line with expectations on a monthly basis, was expected to rise 2.9% on an annual basis. It rose 0.2% monthly and 2.9% annually in August.

Besides, the consumer confidence index, measured by the University of Michigan, rose for the first time in five months in December, indicating inflation expectations declined.

Consumers' short-term inflation expectations fell from 4.5% to 4.1% in December, reaching their lowest level since January. Long-term inflation expectations also declined from 3.4% to 3.2%.

Fed officials divided into 'hawks' and 'doves'

At the Fed's last meeting on Oct. 28-29, the decision to cut interest rates by 25 basis points was taken by a vote of 10 to two.

Fed board member Stephen Miran voted for a 50-basis-point rate cut, while Kansas City Fed President Jeffrey Schmid voted to keep the policy rate unchanged.

Hawkish Fed officials oppose rate cuts as part of the fight against inflation and support tighter monetary policy, while doves want rate cuts to continue, citing the weakening labor market.

The minutes of the FOMC's October meeting also reveal that Fed officials are divided on interest rate cuts.

Following Fed Chair Jerome Powell's remarks indicating that a rate cut in December was not certain, markets began pricing in the possibility that the policy rate would remain unchanged this month.

'A weakening labor market amid moderate inflationary pressures'

Olu Sonola, head of US economic research at Fitch Ratings, told Anadolu that Friday's personal consumption expenditure data, although backward-looking, contained two pieces of good news: Inflation was tame and in line with expectations, while consumer spending — flat in September — posted a solid 2.7% gain in the third quarter, edging up from 2.5% in the second quarter.

He said the resilience of the US consumer remains a critical pillar of broad-based economic growth, even amid post-tariff inflation pressures and weak sentiment.

"For the Fed’s decision next week, this likely bolsters the case for a rate cut if the focus stays on a weakening labor market amid moderate inflationary pressures," he added.

'Latest data raises questions for January meeting'

Padhraic Garvey, ING's regional head of research, said it is remarkable how US data continues to show material pockets of resilience, despite the dominant acceptance that the labor market is under a degree of pressure.

Garvey said the Challenger Jobs report saw another month of sizeable lay-offs, but at the same time the jobless claims data remains indicative of a relatively firm labor market, and the latest orders data was also reasonably upbeat, in particular durable orders.

Citing Friday's personal consumption figures, Garvey said the personal consumer spending and income data are firm, although real spending is a tad compromised by the eat up of inflation.

"Looking to next week, the probability for a Fed rate cut is at 95% - so it's going to happen!" he added.

'There are downside risks in the labor market'

Steven Kamin, a senior fellow at the American Enterprise Institute (AEI), also pointed to mixed employment data, saying: “All in all, I'd point to a murky labor market picture, but with risks to the downside.”

Referring to the delayed inflation data, Kamin said that the 2.8% annual increase in the core personal consumption expenditure price index in September was high, while the 0.2% monthly increase was in line with the Fed's expectations.

“The risky employment picture and the lack of a more concerted rise in inflation will give the Fed the excuse it needs to cut rates another 25 basis points next week,” Kamin said.