The U.S. Federal Reserve's decision to cut interest rates in December: Good news or a bad omen?

The US Federal Reserve (Fed) will almost certainly cut interest rates at its meeting in December. Friday's jobs report reinforced this decision, giving the Fed enough room to act without being seen as overly reckless. The non-farm employment increased by 227,000 in November, exceeding expectations, while the unemployment rate ticked up to 4.2%. The market hardly reacted, with CME Group currently pricing in a 90% chance of an interest rate cut. But it seems like this is not good news. Some analysts have criticized the Fed's decision, arguing that the central bank is creating conditions for risk speculation Although inflation is not yet fully under control, wages continue to rise and some are concerned that financial conditions are now becoming too loose. At the same time, the Fed faces difficult questions about how much rate cuts can be achieved without imbalances in the economy. Why does the timing seem uncertain? Economists have conflicting views on the Fed's policy, and there is no shortage of skepticism. Economist Chris Rupkey argues that the Fed does not need to intervene, especially when employment is abundant. He calls the central bank's strategy "increasingly unwise" and warns that inflation is still not under control. The numbers are proving his argument. The core inflation, measured by the Fed's preferred index, rose to 2.8% in October. This figure is much higher than the Fed's 2% target. Wage growth is also not helpful. At 4%, this figure is significantly higher than pre-pandemic standards. Jason Furman, former economic advisor to the Obama administration, also does not believe in the optimism of the Fed. He pointed out that the current wage growth rate is more in line with 3.5% inflation, rather than the Fed's target of 2%. Furman said: This is another data point in the no-land scenario. He predicted more rate cuts, but only after unemployment rises even higher. Much looser financial conditions Although Fed officials often describe their 4.5%-4.75% interest rate as "restrictive," financial indicators tell a different story. Stocks are rising sharply, bond yields are falling, and mortgage rates continue to decline. According to data from the Fed itself, the current financial conditions are at their loosest level since January. This raises an important question: Will the Fed cut interest rates in an already loose capital environment and if so, what will happen next? Jerome Powell, the Fed chairman, is optimistic about the US economy. Recently, he called this economy the "envy of the developed world," believing that the economy is now strong enough to adjust policy cautiously and gradually. But not everyone on the Federal Open Market Committee (FOMC) supports his view. Cleveland Fed President Beth Hammack wants to slow down interest rate adjustments. In a statement on Friday, she said that more evidence is needed to show that inflation is approaching the Fed's 2% target. She has repeatedly expressed the view that the pace of interest rate cuts should be slowed down, and her comments suggest that the Fed may pause after the rate cut in December. If the interest rate cut in December is approved, this will be the first one-percentage-point reduction since September - a significant loosening in a short period of time. Hammack believes that the Fed is approaching a neutral interest rate - a rate that neither stimulates nor hinders economic growth. According to her, this is the time to reassess the situation. "Reducing the cutting speed of interest rates is reasonable", she said. When these figures are released, the Fed will not make any policy statements until the meeting is over.