The Fed will almost surely cut rates at the final FOMC meeting of 2024. In my view, the move won’t be warranted.

That doesn’t mean a cut at the December gathering won’t be defensible, though. Inflation’s come down, real rates are positive, jobs growth is slowing (maybe) and the latest CPI release, while far from perfect, at least suggested housing disinflation might’ve finally arrived.

Further — and this is probably the best argument if you’re the Fed and you’re determined to squeeze in another cut or two or three — the idea is to be proactive, not reactive. You want to stay ahead of the game if you want to stick the soft landing. If you wait around on indisputable proof that the labor market’s turned for the worse or that the growth candle’s flickering such that the faintest breeze will snuff it out, it’s too late. Remember: It was the Fed’s failure to act in advance that got the Committee into trouble on inflation in the first place, although you could argue it wouldn’t have mattered.

There are two issues, though. (There are a lot more than two issues, but bear with me). First, the Fed already took out insurance against a hard landing. They cut 50bps in September when the labor market looked shaky, and then they cut again in November. Second, employers are still hiring, workers still have some leverage in comp discussions and, critically, Americans are still spending in aggregate. Further, equities are perched at record highs and so are home prices, so at least for the “haves,” the wealth effect’s quite strong, which underpins consumption.

So… I don’t know. With allowances for the fact that a majority of US households are on the wrong side of America’s “K-shaped” economy, and thereby could use the rate relief, the case for additional cuts isn’t any sort of slam dunk with core inflation still running near 3% and considering the distinct possibility that neutral’s a lot higher than it used to be, particularly in the near- to medium-term, and especially in the context of the incoming administration’s determination to run the economy hot in perpetuity.

The figure above shows you what a mess this is or, more generously, it illustrates the disagreement between models and estimates about where, in fact, neutral is over the longer run.

To reiterate: Neutral’s almost surely higher in the near-term, with allowances for the ironic possibility that higher rates are behind some of the spending impulse given how much interest income money funds are throwing off for America’s well-to-do. (So, to keep rates high may be to keep neutral high.)

Let me put it as a question: Is it implausible to suggest that near-term, nominal neutral’s 1ppt higher than the median Fed official’s longer run dot? I don’t think so. And that dot’s 2.9%. If nominal neutral’s 4% in the current environment, then policy’s barely restrictive. Additional cuts would mean policy isn’t restrictive at all.

That’s the crux of the issue if you ask me. I think this is a Fed that doesn’t want policy to be restrictive anymore, so they’re overstating, deliberately, the extent to which current settings are holding back the economy in order to justify more cuts, the idea being to get rates down to neutral and then call that level “slightly restrictive.” Why the pretense? Simple: Inflation’s not back to target.

If you’re waiting on core PCE to make it back to 2%, you could be waiting a while. An update on the Fed’s preferred price gauge, due Friday with November’s personal income and spending data, will probably show core price growth decelerated on a MoM basis to 0.2%, the coolest in months and consistent, if it were sustained, with incremental renewed disinflation on the 12-month pace. But as the figure below reminds you, we’re not in Kansas anymore, and the job isn’t finished.

In recent months, underlying price growth’s drifted up, which is to say it’s gone in the wrong direction. Barring a significant economic downturn, and commensurate diminishment in overall demand, my guess is that the Fed will find it difficult to wrestle the core measures back down to target on a reliable, sustainable basis.

The December FOMC meeting will of course be accompanied by a new SEP, which’ll give investors clues as to… you know what? Who am I kidding? It’ll be what it always is: A collection of wrong guesses as to inflation and also as to the outlook for the price of money, which the Committee isn’t especially adept at forecasting despite being the panel who sets it.

Rampant uncertainty around the implications of the new Trump administration’s policies (fiscal, trade, immigration and so on) for the domestic and global economy add an extra layer of ambiguity for the Fed, and Jerome Powell will be interrogated about whether the Committee’s deliberations included a discussion about tariffs and deportations for growth and inflation. He’ll dodge as best he can.

One way to think about it is to observe that deporting unskilled labor could be doubly bad to the extent it reduces the headline pace of jobs growth and puts upward pressure on pay for low-wage jobs, as Americans refuse to do menial work for pennies. That could be a stagflationary result, particularly if paired with tariffs, although there’s a lot of “netting out” to consider (e.g., yes, deporting a bunch of people could mean wage growth’s stickier than it would’ve been, biasing services inflation higher, but those deportations would also reduce overall demand, perhaps mitigating price pressures, even as some of that lost demand could be recovered through higher real wages for Americans, and so on and so forth).

Ultimately, this is a very difficult juncture for the Fed. They’re on the cusp of pulling off the impossible (i.e., a soft landing) but it’s a Pyrrhic victory: The increase in the overall price level from two years of high inflation cost the American political establishment another election, so now a Fed that’s just beginning to recover its poise and swagger is compelled to confront another four years of right-wing populism, which by every indication will be a lot more assertive this time around than it was during Trump’s first term.

Also on the US docket this week: Retail sales, builder sentiment, housing starts, existing home sales and the final estimate of Q3 GDP.