Cutting interest rates to save jobs or standing firm in the face of inflation?

Fed officials are divided on whether to cut the benchmark interest rate in December, as evidenced by policymakers’ comments this week.

Two members of the Federal Open Market Committee spoke publicly on Wednesday, but each made their case very differently. Atlanta Fed President Rafael Bostic defended keeping interest rates steady, while Governor Stephen Meiran asserted that the federal funds rate is too high and needs to be lowered quickly and sharply.

Not surprisingly, financial markets are unsure about the next step the Fed will take at its December meeting. Traders currently expect a 60% chance that the Federal Reserve will cut its benchmark interest rate by a quarter of a percentage point next month, according to CME Group’s FedWatch tool, which forecasts price movements based on federal funds futures trading data.

The Fed is torn between its dual mandate of keeping inflation low and employment high. Typically, when inflation is high, the central bank raises the federal funds rate, which increases borrowing costs on loans and slows the economy to balance supply and demand. When the labor market faces difficulties, the Fed can lower interest rates to make loans more affordable and encourage hiring.

But right now, both data points are trending in the wrong direction.

“I think the risks to both mandated goals make this the most challenging environment since I became governor in 2017,” Bostic said at the Economics Club of Georgia in Atlanta.

The Fed has cut interest rates twice in its last two meetings, but Fed Chairman Jerome Powell went out of his way last month to say a third cut was not guaranteed. Whether or not this happens depends on how Fed policymakers balance the threat of inflation and high unemployment.

The issue to worry about is inflation

Bostic said he favored keeping interest rates steady, even though that was a “very close call.”

He also noted that inflation has been above the Fed’s 2% target for nearly five years, when pandemic-era supply shortages led to a horrific bout of price increases. By many measures, inflation has risen in recent months, at least in part because tariffs imposed by President Donald Trump have pushed prices higher.

“I see no indication that price pressures will dissipate before mid- to late 2026, at the earliest,” Bostic said.

Companies plan to raise rates further in the coming months, according to surveys by the Federal Reserve Bank of Atlanta. That’s the main reason Bostic said he’s more concerned about inflation, even though the ongoing government shutdown has delayed much of the price data the Fed typically uses to make such decisions.

Slowing increases in house prices could dampen inflation

Bostic’s colleague, Miran, offered the opposite view on Wednesday in a fireside chat at the University of Cambridge in Britain. He added that high interest rates are not necessary to combat inflation, and in fact they risk harming the labor market.

In Miran’s estimation, inflation will change soon. As evidence of this, Miran pointed to the fact that increases in housing costs, by far the most important component of inflation indicators, are slowing.

Since it takes about a year for these prices to seep into inflation measures such as the CPI, there is already a significant amount of inflation deceleration ahead. Therefore, he said that the Fed should cut interest rates aggressively, and the current interest rates were fighting the inflation battle yesterday.

“I think the Fed’s policy is too restrictive,” he said. “I think this policy is being made on a reactionary basis.”

Waiting for new data

With the government shutdown expected to end on Wednesday, the Fed may finally be able to see some government data that could influence its opinion. The federal government shutdown has delayed key reports on the labor market and inflation, but some may be released before the Fed’s next meeting.

Economists at Goldman Sachs expect the Bureau of Labor Statistics to release a long-awaited labor market report for September within a week of reopening.

The reports for October are more problematic and may never be published, since the government was shut down when the Bureau of Labor Statistics and other agencies were supposed to collect that data. Reports for November could be delayed until after the FOMC meeting on December 9-10, according to a Goldman analysis.