Why the Fed May Hit Pause in December — When Rate Cuts Stop Working

Federal Reserve Chair Jerome Powell surprised markets this week by suggesting that another rate cut in December is “far from a done deal.” His remarks — following the Fed’s 25 basis-point reduction — signal growing doubts within the central bank about whether more easing would help the U.S. economy at all.

Powell’s Message: Rate Cuts Aren’t a Cure-All

During his post-meeting press conference, Powell outlined several reasons for a potential pause:

• Divergent views among policymakers

• Limited data visibility due to the ongoing government shutdown

• Persistent above-target inflation

• Uncertainty about how quickly the labor market is cooling

Perhaps most striking, however, was Powell’s admission that rate cuts may no longer be the right tool to support the economy.

The labor market’s recent weakness, he explained, stems more from shrinking labor supply — tighter immigration, early retirements, and declining participation — than from weaker demand for workers. Lower rates, which stimulate demand, cannot fix a supply-side shortage.

“If the job market’s problems are mostly a function of labor supply, then cutting interest rates is akin to pushing on a string,” Powell said. “It’s a complicated situation.”

A ‘K-Shaped’ U.S. Economy

The U.S. now faces what economists call a “K-shaped” economy — one where the wealthy continue to benefit from asset gains, while lower- and middle-income households struggle.

Job growth has slowed, but much of that reflects fewer people looking for work. The unemployment rate ticked up to 4.3% in August, still low by historical standards, yet indicative of cooling momentum.

Meanwhile, business investment and retail spending remain firm — largely fueled by booming stock markets and wealth concentration among the top 10%, who drive nearly half of all U.S. consumption.

The Fed’s Policy Dilemma

This uneven landscape leaves the Fed in a bind. Rate cuts, which typically support hiring and spending, could inflate asset prices further, worsening inequality without meaningfully improving labor conditions.

Powell’s challenge is to avoid over-stimulating markets while addressing pockets of economic softness.

With 150 basis points of easing already delivered, the Fed’s policy stance may now be near neutral, limiting the case for further cuts.

Looking Ahead

The Fed’s December meeting — six weeks away — remains pivotal. A third consecutive cut is no longer guaranteed, and Powell’s tone suggests patience may prevail as policymakers gauge inflation trends and job data.

For investors, the message is clear:

The rate-cut cycle could be nearing a pause, and the Fed’s focus is shifting from stimulus to stability. Markets may need to adjust to an environment where cheap money alone can’t lift all boats.