Inflation remained stubborn and the labor market rebounded in recent reports, but that was not enough to derail market expectations that the Federal Reserve would cut its all-important interest rate in December.

Financial market participants widely expect Fed officials to lower the central bank’s benchmark. federal funds rate by 0.25 percentage points at the next meeting of the central bank’s policy committee. Markets were pricing in an 85% chance of a cut Friday afternoon, according to CME Group’s FedWatch tool, which forecasts rate movements based on federal funds futures trading data. This would be the third rate cut in as many meetings.

Fed officials are trying to cut interest rates enough to stimulate the economy and prevent a surge in unemployment, but not so fast that they would reignite the high inflation that has rocked the economy in 2022. The funds rate Federal funds influence interest rates on all types of loans, including mortgages and credit cards, so cutting it makes the economy “hotter” by encouraging more borrowing and spending.

The Fed is expected to cut rates, as policymakers have predicted. telegraphed arrives for months. Earlier this week, Fed Governor Christopher Waller said he inclined to support a rate cut. However, he said he was keeping an eye on recent inflation data, which is still above the Fed’s target of an annual rate of 2% and hasn’t made much progress in the right direction lately.

Then, on Friday, a labor market report showed the economy continued to add jobs, bounce storm-related disruptions and reduce the risk of high unemployment that rate cuts are intended to prevent. The Fed sets the country’s monetary policy with a “dual mandate“to fight inflation and preserve the labor market, sometimes contradictory objectives.

A self-fulfilling prophecy?

Economists have offered various explanations for why the Fed seemed likely to cut rates despite the trajectory of recent economic data.

One possibility: Fed officials could take inspiration from financial markets and want to avoid surprises. This is the theory put forward by economists Conrad DeQuadros and Jon Ryding of Brean Capital Markets.

“The Fed does not seem inclined to disappoint market expectations, so assessing the outcome of the next Fed meeting actually determines the outcome of the monetary policy decision,” they wrote in a commentary. “If futures markets on the day of the next Fed meeting were pricing in a 10% chance of a rate cut, we might assume the Fed would skip the December meeting, but if markets were pricing in a 90% probability – as is the case now – we think the Fed would cut rates.

Another possibility is that the labor market truly slows down or even collapses, so the Fed continues to be under pressure to step in and save it. During the first half of the year, 207,000 jobs were created on average each month. However, since July, the average number of jobs created each month is 148,000. Even excluding the hurricane-related decline in October, this is down from the first half of the year.

“November labor market data gives the green light for the FOMC to ease policy again this month,” Samuel Tombs, chief economist at Pantheon Macroeconomys, wrote in a commentary.