As the release of November's nonfarm payroll and unemployment data draws near, market observers closely analyzed Federal Reserve Chair Jerome Powell's speech for clues about the central bank's policy path. Traders, carefully monitoring Powell, have slightly increased their expectations for an additional rate cut on December 18. However, the data set to be released on Friday could significantly influence the Fed's decision.

In a speech delivered early Thursday, Powell stated that the economy is "in remarkably good shape" and that its growth performance has been stronger than previously anticipated. He reiterated that there is no reason to believe the robust economic conditions cannot persist.

At the same time, Powell emphasized that inflation has not yet returned to the Fed's target and noted that downside risks to the labor market have diminished. Reports signaling that the labor market remains resilient provide the Fed with room to adopt a more cautious stance. Powell confirmed this approach, suggesting that the central bank can afford to be a little more cautious as it seeks a neutral rate that neither stimulates nor restricts the economy.

Although Powell refrained from offering specific insights on this month's decision, Fed watchers argue that he has not ruled out the possibility of a rate cut. According to swap market data, there is a 74% probability priced in for a quarter-point cut in two weeks. However, officials will need to weigh all incoming data leading up to the meeting date.

The 218K Bet: Is the Labor Market Strong Enough to Hold Steady?

Following a half-point rate cut in September, the Federal Reserve implemented an additional quarter-point cut in November. These measures were primarily aimed at preventing further cooling in the labor market while inflation progressed toward the 2% target.

However, data since October has indicated a pause in inflation's momentum, prompting Fed officials to adopt a more cautious approach. At this juncture, the only factor likely to prompt policymakers to accelerate rate cuts would be data signaling a deterioration in the labor market.

Private-sector payroll data released Wednesday by the ADP Research Institute reinforced the belief that the labor market has softened but remains robust. Private payrolls increased by 146,000 in November, while October's figure was revised down to 184,000. The reported number was nearly in line with economists' median forecast of a 150,000 increase.

ADP's report supported the expectation that the Fed has no immediate need to rush rate cuts. However, traders are awaiting the government data set to be released on Friday to refine their outlook.

The nonfarm payroll data released by the US Bureau of Labor Statistics is considered a more accurate benchmark as it covers approximately 80% of the US workforce. Following October's payroll increase of only 12,000—hampered by hurricanes and worker strikes—economists surveyed anticipate a rise of 218,000 in November.

Such a figure would provide stronger evidence that the U.S. labor market remains healthy and enable the Fed to reduce interest rates at a more cautious pace as it works to determine the neutral rate. However, given that the temporary effects of hurricanes and strikes have subsided, a weak report could compel the Fed to make faster cuts.

The data to be released on Friday will serve as the final critical labor market report ahead of the year's last monetary policy meeting, scheduled for December 17-18. Beyond this, officials will also assess consumer and producer price indices on December 11-12 and retail sales data just one day before the decision.

These final key data points for the year have the potential to influence not only this month's decision but also the Fed's projections for the year ahead.

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