Could the Federal Reserve end interest rate cuts after December? This possibility should perhaps not be dismissed.

Wednesday's inflation data showed that consumer prices rose 2.7% year-on-year in November, up from 2.6% in October, but the market seemed unperturbed. The S&P 500 Index rose 0.8% that day, and the Nasdaq closed above 20,000 points for the first time. This reflects that the market breathed a sigh of relief as the inflation data only met expectations rather than increasing further.

Nevertheless, the data confirmed a troubling trend that the decline in inflation has either stopped or at least stalled. Excluding food and Energy, core consumer prices rose 3.3% year-on-year, similar to the pace of increases in recent months. Particularly concerning is that service inflation, excluding Energy services, rose 4.6% year-on-year.

This seems insufficient to deter the Federal Reserve's plan to cut rates at the December meeting. According to CME's FedWatch tool, as of Wednesday, the futures market priced in a 96% chance of this occurring.

The market bets that the gradual slowdown in hiring over the past few months has made the Federal Reserve still satisfied with some additional easing policies. Factors like strikes and hurricanes have made the data somewhat difficult to interpret, but the basic trend remains clear: the three-month average for job growth has fallen from 0.243 million people at the beginning of 2024 to 0.173 million in November.

Pricing in Interest Rates futures also indicates that after December, the Federal Reserve is expected to cut rates by 25 basis points two to three more times by the end of next year.

This may be too optimistic. Despite the economic slowdown, job positions still recorded considerable growth, and the overall economic momentum remains strong, with the annualized growth rate of real GDP in the third quarter at 2.8%. The inflation rate is now clearly stagnating around 3%, above the target level of 2%. Given this, does the Federal Reserve have any compelling reason to continue lowering interest rates?

Moreover, this does not yet take into account the policies that the Trump administration may adopt, such as tax cuts, cracking down on immigration, and new tariffs. It remains uncertain how many of these potential policies will come to fruition and when they might be implemented, but it seems likely that at least some of these three policies will be realized. All of these policies could lead to inflation.

The Federal Reserve publicly insists that it has not even considered the impact of these policies. However, the public data has already given the Federal Reserve enough reason to pause interest rate cuts; this would also have the additional benefit of allowing it to wait and see what will happen under Trump's leadership.

Therefore, at least do not expect the Federal Reserve to continue happily cutting interest rates in the first few months of next year. Moreover, do not overlook the possibility of a "one-and-done" scenario in this round of easing: that is, the Federal Reserve will lower interest rates by a full percentage point, and that will be it. Then, December will be the last rate cut.

Editor/lambor