Two senior Federal Reserve policymakers warned Monday that the labor market is losing strength, sharpening the debate over whether the central bank should deliver another rate cut at its final meeting of the year.
Fed governor Chris Waller said he supports lowering interest rates next month, arguing that a softening job market is now a greater risk than a resurgence in inflation. He signaled that upcoming data, including the September jobs report due this week, is unlikely to change his view.
“The data leads me, at this moment, to support a cut in the FOMC’s policy rate at our next meeting on December 9 and 10 as a matter of risk management,” Waller said in a speech titled “The Case for Continuing Rate Cuts.” He added that “a December cut will provide additional insurance against an acceleration in the weakening of the labor market and move policy toward a more neutral setting.”
Waller said he believes the labor market is “still weak and near stall speed,” pointing to Labor Department figures from May through August that showed job creation slowed sharply. After revisions, he said it is likely employment actually declined during that period. He argued that weaker demand for workers, rather than reduced labor supply from lower immigration, is driving the downturn.
He also dismissed concerns that data uncertainty should delay action, adding that he sees no signs of rising wage growth, increasing job openings or a higher quits rate that would suggest a worker shortage rather than weakening demand.
Fed vice chair Philip Jefferson struck a more cautious tone. While acknowledging that “downside risks to employment have increased” relative to inflation pressures, he urged a slower pace in easing.
“The current policy stance is still somewhat restrictive, but we have moved it closer to its neutral level that neither restricts nor stimulates the economy,” Jefferson said in a speech in Kansas City. He stressed that “the evolving balance of risks underscores the need to proceed slowly as we approach the neutral rate.”
Jefferson noted that the central bank may receive limited government data ahead of the Dec. 9 to 10 meeting because of delays linked to the recent shutdown, saying that a “meeting-by-meeting approach” is “an especially prudent approach” in the current environment.
He said inflation may have stalled around 3 percent due to tariffs, but he still expects the tariff impact to be a one time price increase instead of the start of broader inflation pressures. He pointed to unemployment insurance claims that have moved sideways in recent weeks and said anecdotal evidence on the labor market remains mixed.
Waller said inflation data through September continued to show only small effects from tariffs, reinforcing his view that tariffs are raising prices temporarily rather than driving a sustained rise. Excluding these effects, he believes inflation is close to the Fed’s 2 percent goal.
He also cited “soft” data such as the steep October decline in consumer sentiment measured by the University of Michigan. He noted the drop was broad based across demographic groups, except among stockholders, and added that past declines in sentiment have often preceded recessions.
Their remarks highlight growing divisions inside the Fed. Kansas City Fed president Jeff Schmid and Boston Fed president Susan Collins have recently voiced concerns about cutting rates further, warning that inflation remains too high.
Market expectations for a December rate cut have fallen sharply. Traders now see a 42 percent chance of easing next month, down from 94 percent only a month ago, as uncertainty builds over how the Fed will interpret weakening labor data and sticky prices.
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