Reasons for a 50 basis point rate cut: weak employment, cooling inflation, and Federal Reserve disagreements

Author: Anthony Pompliano, Founder and CEO of Professional Capital Management, Translation: Shaw Jinse Finance

Federal Reserve Chairman Jerome Powell and the Federal Open Market Committee (FOMC) have begun a two-day meeting, and the market is closely watching whether the Fed will cut interest rates.

The odds of a 25 basis point rate cut on Polymarket have risen to 95%, while the probability of keeping rates unchanged is 5%.

If the Fed cuts rates, this will be the third consecutive rate cut this year (following a 25 basis point cut in September and another 25 basis point cut in October). Even though inflation remains high, a rate cut would serve as “insurance” against increasing risks in the labor market.

But I would like to outline why the Fed should actually cut rates by 50 basis points tomorrow. First, we know the labor market is weakening, and if not actively addressed, this could trigger concerns about a broader economic slowdown or even a recession.

Nonfarm payrolls rose by only 119,000 in September, a sharp slowdown from the post-pandemic average and below expectations. As a result, the unemployment rate edged up to 4.4%.

So far this year, the number of layoff announcements has soared to 1.17 million, the highest since the outbreak of the pandemic in 2020. Meanwhile, it is reported that hiring plans have dropped to their lowest levels since the end of the financial crisis.

Finally, private sector indicators like the November ADP employment data and the Challenger layoff report have weakened further. These trends indicate that job growth is insufficient to match the expansion of the labor force. Given the state of the labor market, the argument for a 50 basis point rate cut is that a larger rate cut would help employment and prevent a vicious cycle of reduced consumption and further hiring freezes.

But the case for a 50 basis point rate cut doesn’t depend solely on the labor market.

I believe that the government’s published inflation metrics seriously overestimate the level of inflation, which also supports a larger rate cut. The core Personal Consumption Expenditures (PCE) inflation rate is currently around 3% (about 1% above target), but disinflationary factors have reduced the risk of inflation reaccelerating. This should allow the Fed to focus more on the employment side of its dual mandate.

Critics claim that due to tariffs and fiscal stimulus, goods prices remain high, but falling oil prices, an oversupply of rentals, and declining home prices present deflationary risks; in my view, this gives the green light for a larger rate cut.

Beyond these factors, both the Fed’s own forecasts and market-implied inflation expectations remain anchored near 2%. This is clearly below the consumer survey forecasts of close to 4%, but we know these surveys are biased and can diverge even more from market consensus. A 50 basis point rate cut aligns with the Fed’s October statement that “policy will be adjusted as appropriate if risks emerge,” so the Fed could easily frame a larger cut as targeted support, not a policy pivot.

So, we are facing a weak labor market and an inflationary environment, but ultimately, the decision to cut rates by more than 25 basis points is still up to the FOMC members.

Fortunately, there are some pragmatic voices within the Fed who seem to believe that a larger rate cut would be beneficial. We know there are significant divisions within the Fed, which could set the stage for a surprise, larger-than-expected rate cut.

Fed Governor Steven Mirren has voted no in the last two meetings, advocating for a 50 basis point cut. In November, he said a large December cut would be “appropriate” to address labor risks. At the time, he said the December rate cut should be “at least 25 basis points, but if there’s no new information… 50 basis points is appropriate.”

Mirren isn’t alone in this view. New York Fed President John Williams and San Francisco Fed President Mary Daly have also voiced support for easier monetary policy. Williams has explicitly stated that he sees a rate cut as “insurance” against a labor market downturn that would not jeopardize the inflation target.

So, what do analysts think will happen within the Fed?

Nomura analysts predict that Mirren will take a dovish stance and push for a 50 basis point cut, while other members may take a hawkish stance and even oppose a 25 basis point cut. This highlights an unusual division among committee members over easing policy.

This internal dynamic is rare, because in the past 35 years, we’ve almost never seen such sharp disagreement—which could prompt policymakers to take bolder action or cut rates more aggressively.

So, what are my expectations?

I think ultimately it will only be a 25 basis point cut. I wish it would be 50 basis points, but I just don’t see enough momentum within the Fed for a more aggressive move. Market dynamics suggest the cut should be larger. The economy would also benefit from a bigger cut. Unfortunately, the Fed’s strategy is too conservative. They’re afraid to face themselves, let alone make bold decisions.

Now we’re all waiting for the result. The Fed is holding the FOMC meeting. Trillions of dollars will ride on what Jerome Powell says at tomorrow’s press conference.

The world will keep turning, the U.S. economy will keep strengthening, and the stock market will rise sharply in the coming months. The Fed can’t stop this trend, no matter how poorly they manage monetary policy.