The Great Rate Cut Reversal – How Weak Labor Data Just Made December Interesting Again
Buckle up, market enthusiasts! The Federal Reserve’s mood has done a 180 degrees in just a few days, and it’s creating waves across Wall Street and beyond.
Talk about a plot twist! Just when investors were convinced that the Federal Reserve would keep interest rates steady through December, that narrative flipped faster than a pancake on Sunday brunch. The buzz now? A potential Fed rate cut at the December 9-10 meeting is back in vogue—and it’s sending markets into a frenzy of excitement.
Why the sudden mood swing? It all boils down to the labor market, a critical Fed mandate alongside inflation control. For weeks, the job market was flexing strong, leaving the Fed conflicted but leaning toward a pause. Then on November 22, New York Fed President John Williams, who’s in the inner circle as the FOMC vice chair, spilled the beans during a speech. His message was clear: the downside risks to employment have “increased as the labor market has cooled,” while inflation worries have “lessened somewhat.” Translation: jobs aren’t as hot as we thought, and inflation might be manageable enough to ease rates.
Before this, markets had slapped just a 30% chance on a December cut. Now, after Williams’ talk and similar signals from other Fed officials like Governor Christopher Waller and San Francisco Fed President Mary Daly, that probability soared above 75%—some say closer to 85% by Tuesday’s close. The market is basically gearing up for a “25-basis-point” cut to make borrowing cheaper, boosting investment and economic juice.
The backdrop isn’t all rosy though. The U.S. government shutdown threw a wrench in data reporting, delaying key employment reports. When those reports finally trickled in, they showed that unemployment rose slightly to 4.4%, and job creation slowed—a nudge that the economy’s engine might be losing steam. Goldman Sachs’ top economist Jan Hatzius even called the September jobs report “badly delayed” but “likely sealing the deal” for a December cut. Williams, who rarely goes against Chair Jerome Powell’s views, seems to have given the green light—probably after some serious backroom chats with Powell and the Board of Governors.
Markets didn’t just dip a toe; they dove headfirst. On Tuesday, the Dow Jones Industrial Average Dow Jones Industrial Average skyrocketed over 660 points (around 1.4%), the S&P 500 S&P 500 jumped almost 1%, and the tech-tilted Nasdaq Composite Nasdaq Composite gained about 0.67%. Across the globe, Asian markets reacted positively, extending the momentum. This surge was fueled by expectations that lower interest rates would make money cheaper, leading to better borrowing conditions for companies and happier consumers.
Looking ahead, here’s where it gets intriguing: the upcoming Fed meeting is sandwiched between the end of the government shutdown and fresh data releases, including October’s jobs and inflation numbers, which won’t be available until after the meeting. That means Fed officials are relying on incomplete information, boosting uncertainty in the markets.
What does this mean for retail investors? Volatility could spike as traders react to every new bit of data. If inflation surprises on the upside or jobs show unexpected strength, the rate cut hopes might evaporate quickly. Conversely, weak data will reinforce expectations of easier money ahead. So, keep your coffee strong and your eyes peeled for economic releases leading up to December 9-10—it’s a make-or-break moment for one of the biggest market storylines of the year.