The Federal Reserve has a dual mandate to keep inflation and unemployment low. It’s harder to do than it sounds. The goals often contradict each other because raising rates lowers inflation but causes job losses, and cutting rates reduces unemployment but causes inflation.
The dynamic has put the Fed in a particularly tight spot in 2025. After cutting rates by 1% at the end of 2024, Fed chairman Jerome Powell paused additional cuts over worry of fanning inflationary flames even as newly instituted tariffs increase prices.
The hesitancy, however, has come at a cost.
The jobs market has continued to weaken. Unemployment is 4.4%, the highest since 2021, and employers laid off 153,074 people in October, up 175% from one year ago, according to Challenger, Gray & Christmas.
As a result, the Fed cut its Fed Funds Rate by a quarter percentage point in September and November to shore up the job market. Whether it cuts again in December, however, is anyone’s guess. Inflation has rebounded to 3% from 2.3% in April, before most tariffs kicked in, and given strong GDP figures, the Fed may decide to return to the sidelines to see if cuts so far are helping.
While that’s a real possibility, recent comments by Fed member Christopher Waller suggest a rate cut on December 10 remains on the table.
Fed’s Waller supports December rate cut
The Fed’s next interest rate decision is scheduled for December 10. Until last week, the CME FedWatch tool, which ranks interest rate probabilities based on the futures market, indicated a 42% chance of a cut.
However, stock market weakness, including a sharp negative reversal last week after Nvidia’s earnings results, and dovish comments from New York Fed Governor John Williams on Friday, have significantly shifted those odds, lifting them to 71%.
“I still see room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral,” said Williams.
On Monday, they climbed even further, reaching 84% following Waller’s comments.
Related: Legendary investor shares bold Fed rate cut prediction
Waller is a Fed Governor appointed by President Trump in 2020. He’s widely viewed as being on the short list to replace Powell as chairman next year when Powell’s term expires.
In a Fox Business interview, Waller said he continues to think the greater risk to the economy is rising unemployment:
While the government shutdown has limited recent employment statistics, Waller said that most evidence from alternative data sources suggests that “nothing has really changed,” implying that more support from lower rates makes sense.
“I don’t think inflation is a big problem going forward, said Waller. “I’m advocating for a rate cut at the next meeting.”
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Waller has a vote at the December meeting, but his vote is one of 12, and not everyone agrees that inflation will pull back or that a rate cut is wise, given that inflation is climbing.
Boston Fed’s Susan Collins said that she’s still undecided but sees rates as currently appropriately mildly restrictive, as the Fed tries to balance its dual mandate.
