In the face of economic resilience, a relatively stable job market, and easing inflationary pressures, the urgency for the Federal Reserve to implement interest rate cuts has diminished significantlyOn December 4, the latest release of the Fed's Beige Book survey highlighted a slight uptick in economic activity during November, following months of little change, indicating an increasing optimism among businesses regarding demand prospects.

Since early October, a subtle expansion in economic activity has been reported in most regions of the United States, with many areas noting only modest growthSpecifically, three regions indicated “moderate to modest” increases, while two others observed levels that remained “unchanged or slightly slowed.” Inflation levels remain generally mild, though some regions expressed concerns over potential price hikes resulting from anticipated new tariffs in the U.S

Furthermore, hiring activities have remained subdued amidst low employee turnover and limited layoffs, with industry contacts optimistic about stable employment levels and moderate growth moving forward.

Professor Li Huihui from EM Lyon Business School analyzed the Beige Book’s findings for reporters, suggesting that the reported slight rise in economic activity reflects the underlying resilience of the U.SeconomyThis resilience is attributed to steady consumer support and a partial recovery in business investments.

Moreover, Fed Chair Jerome Powell noted that the current economic situation exceeds expectations from when the Fed initially began cutting interest rates in SeptemberHe indicated a reduced risk in the labor market downturn and mentioned a slight uptick in inflation rates, signaling a cautious approach towards slowing the pace of future rate cuts: “As we strive for a neutral level, we can afford to be a bit more cautious.”

This suggests that the Federal Reserve may be transitioning into a phase of “intermittent rate cuts,” steering away from drastic single cuts of 50 basis points or consecutive reductions.

The Beige Book conveys a relatively positive message overall, with economic conditions, employment, and inflation all appearing under control

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Regularly published eight times a year, the Federal Reserve's Beige Book captures qualitative information about economic conditions and perceptions across 12 Federal Reserve districtsThe latest publication is based on data collected by November 22 and reflects optimistic sentiments from business outlooks, with consumer spending and business investments likely to further bolster the economic resilience.

In terms of specifics, the current Beige Book articulates that “economic activity has risen slightly in most areas,” a noticeably more positive statement than its predecessor, which emphasized that “nearly all areas remained unchanged.”

On the inflation front, incremental statements remain limited, with most regions reporting insignificant price increasesThe challenge of passing on increased costs to customers persists; yet, some businesses have cautioned that tariffs pose significant upward risks to inflation.

Employment indicators also showed that “employment levels were stable or only slightly increased across various regions.” Although hiring activities remain constrained, the rate of layoffs is low, instilling a cautious optimism regarding a rebound in recruiting efforts

The report specifically highlights strong growth in employment and wages for entry-level and skilled positions, anticipating further growth in the upcoming yearThis reflects a persistent structural issue in the U.Slabor market concerning specialized technical roles, wherein demand significantly outstrips supplyWith an influx of immigrants easing some pressure in entry-level job markets, attention should be paid to potential conflicts emerging from stringent immigration policies that could exacerbate supply-demand imbalances in low-skill labor markets and inflate the “wage-inflation” spiral.

Looking ahead, the sustainability of economic resilience hinges on three key factors: First, whether an “orderly slowdown” in the labor market can prevent a sharp rise in unemployment; second, whether inflationary pressures remain controlled, especially in service and housing sectors; and lastly, how Fed policies translate into impacts on credit markets

Currently, businesses appear more optimistic than previously, yet there looms the risk of “lagging optimism” — actual improvements in demand may not align with anticipated growthOn balance, while the U.Seconomy seems resilient in the short term, vigilance is advised in monitoring consumptive fatigue and potential profit declines in light of global economic softness, with the trend of declining inflation remaining uncompromised.

Powell's emphasis on a “cautious” approach indicates a shift from the decisive interest rate cuts observed earlier in the year, reflecting an improved economic climateThe continued strength of the U.Seconomy allows policymakers to tread lightly in further reductions, without committing to any immediate announcements regarding potential cuts in the upcoming month.

Powell's remarks were his last public comments ahead of the Fed’s December meeting

He maintained a neutral tone regarding monetary policy and expressed confidence in the Fed’s independenceHe acknowledged that while the Fed has yet to achieve its inflation reduction targets, progress is evident, and the current economic environment is more favorable than during its initial rate cuts.

Addressing the Fed’s independence, Powell underscored the broad support from Congress, expressing no concerns about potential risks to maintaining autonomy, assuring a good relationship with government authoritiesHe also stated that potential tariff implementations have yet to materialize, highlighting that monetary policy plays a more crucial role at this junctureThe Fed will continue to model, monitor, and evaluate the implications of any tariff proposals.

Powell's cautious signal suggests that the Fed intends to avoid the destabilizing effects of rapid policy adjustments

This, in turn, hints at the likelihood of limited rate cuts in the forthcoming year, leaning towards an “observational policy adjustment.” This caution is compounded by uncertainties surrounding labor market dynamics and inflationary trends, especially regarding persistent service-sector inflation and possible rebounds in wage growthThe Fed's comprehensive evaluation of tax reform and tariff policies will be pivotal in shaping future decisions, determining how fully these structural effects have been assimilated and, consequently, how flexible monetary policy might be.

Other Federal Reserve officials are adopting a similarly wait-and-see postureStLouis Fed's Bullard stated that as inflation remains above targets and labor market concerns have lessened, policymakers may need to decelerate the pace of interest rate cutsWhen asked about possibly pausing rate cuts in the upcoming meeting, he remarked that timing remains contingent upon the economic situation: “A cut could happen in December or January, or possibly later.”

The situation regarding a potential rate cut in December remains uncertain

While Fed officials indicate a desire to slow cuts, interestingly, the CME FedWatch Tool reported on December 4 that the probability of a rate cut this month has surged to approximately 80%, a notable rise from 72% on December 3.

What accounts for this rising probability of a December rate cut? Market expectations pivoted upwards, primarily due to disappointing economic data, including November's ISM Non-Manufacturing PMI and “Little Non-farm” payroll numbersHowever, fluctuations in market expectations often reflect short-term data responses and may not fully incorporate the Fed's overarching goals and policy continuityFurthermore, the rise in rate cut expectations could also signify market awareness of the “lagging” impacts of current policies, implying that the full effects of these policies have yet to manifestIn the future, the Fed may aim to balance data against expectations, adopting a more cautious pace in its policy timeline.

Anticipation is high that the Federal Reserve may opt for a 25 basis points cut in December, subsequently tapering the pace of rate decreases in the following year

Despite the generally positive signals from the latest Beige Book and Powell's economic assessments, the likelihood of 25 basis points cut in December has increased, while the chances of not cutting are diminishingThis trend can be attributed to two primary factors.

On one hand, the U.SNovember ISM Services PMI, released on December 4, dropped by 3.9 points to 52.1, marking the first decline since June and the lowest level in three months, falling short of market expectations of 55.5. This slowdown indicates that the previously robust service sector growth has moderated, coupled with an ISM Manufacturing PMI reading in contraction territory at 48.4 and an ADP employment figure reaching a four-month low in NovemberThese factors together support the Fed's consideration for a December cut.

On the other hand, several Fed officials have adopted doveish stances throughout the week

Fed Governor Waller expressed dissatisfaction with the current inflation levels but preferred not to overreact and showed support for a rate cut in December, stating that monetary policy rates remain distanced from neutral levelsMeanwhile, New York Fed's Williams forecasts a GDP growth rate of 2.5% or higher for the year and expects unemployment to hover between 4% and 4.25% over the coming months, while maintaining a tight monetary stance, anticipating further rate cuts with inflation gradually trending down towards 2%.

Before the rate decision in December, two critical economic data releases are scheduled: the November non-farm payroll report on December 6 and the November CPI data on December 11. Given Powell's failure to offer definitive signals regarding December cuts, the performance of these two reports may ultimately dictate the Fed's strategic direction.

As uncertainty lingers over the Fed's potential rate cuts, significant divisions among its officials have become increasingly evident