By Indradip Ghosh
BENGALURU (Reuters) -The U.S. Federal Reserve will again lower its key interest rate by 25 basis points next month to underpin a weakening labor market, according to 80% of economists polled by Reuters, up slightly from a poll taken last month.
That strengthening resolve contrasts with the clear disagreement among Federal Open Market Committee members on whether the economy needs another reduction this year, especially in the absence of key official data during the longest-ever government shutdown.
Following a quarter percentage-point cut last month which drew rare dissent in two directions, Chair Jerome Powell warned that a December reduction was not a foregone conclusion.
An 80% majority of economists, 84 of 105, predicted the FOMC would lower the interest rate by a quarter point for a third time in a row on December 10, taking it to 3.50%-3.75%, in line with market pricing. Twenty-one expected no change.
“The general sense is the labor market still looks relatively weak and that’s one of the key reasons why we think the FOMC will continue to deliver that December cut. But the risk to December will be potentially data dispelling that sense of weakness,” said Abigail Watt, U.S. economist at UBS.
A possible government reopening after the Senate approved a temporary funding bill on Monday could clear some of the data fog before that meeting.
“We’re already seeing some kind of disagreement over the extent to which labor market concerns are dominating the inflation dynamic…the tension in the mandate is probably going to worsen as we go into next year. There’s potential we see the economy improving and inflation pressures continuing to rise,” added Watt.
The Personal Consumption Expenditures index – the Fed’s preferred inflation measure – has remained above its 2% target for more than four years, the longest streak since 1995. The poll showed it would average above 2% through 2027.
“It could impact Fed credibility that we’ve had inflation above target for a long period of time. It’s one of those factors people may not notice, may not pay attention to, and then they do all at once… We will take a little bit more caution around viewing tariff inflation purely as temporary,” said Josh Hirt, senior economist at Vanguard.
Nearly half of economists polled still expect the rate to decrease to 3.25%-3.50% next quarter, also the median view. There was no clear majority on where the fed funds rate would be by end-2026.
Nearly 70% of respondents to a separate question, 36 of 52, said job growth has remained roughly the same since the shutdown started, despite private data showing U.S. firms were shedding jobs recently.
While 16 said hiring was worse, none said it had improved. The unemployment rate, last reported at 4.3% in August, was expected to remain unchanged this quarter and increase slightly to average 4.5% next year, poll medians showed.
“The labor market is cooling, yes, but it’s not collapsing by any means,” said Stephen Juneau, U.S. economist at Bank of America Securities. “We’re still seeing low hiring, but we’re not seeing a ton of firing either.”
“December may not be a done deal unless Powell sees more obvious signs downside risks to the labor market are truly materializing.”
The U.S. economy, which grew 3.8% in the second quarter and was forecast to have expanded 2.9% last quarter, will slow to 1.0% this quarter, according to poll medians.
Growth is then forecast to average roughly 1.8%, which Fed officials currently see as the non-inflationary rate, each year through 2027.
(Other stories from the Reuters global economic poll)
(Reporting by Indradip Ghosh; Polling by Renusri K and Aman Kumar Soni; Editing by Ross Finley and Hugh Lawson)
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