In December, the Fed is likely to reduce interest rates, but after that, the future is uncertain.

• The central bank was given more flexibility to cut interest rates due to the moderate nature of the November nonfarm payrolls release.
• Rewritten sentence: The cat sat on the windowsill, watching the birds outside.
• According to economist Joseph LaVorgna, who was a senior economist during President-elect Donald Trump's first term, there is no need to reduce rates at this time. Instead, he advised pausing.
• The only thing remaining on the agenda that could prevent the Fed from making a December rate reduction is the upcoming release of individual reports on consumer and producer prices.

The Federal Reserve is likely to approve an interest rate cut based on Friday's jobs report, but the decision on whether to do so and its next steps remain uncertain.

The November nonfarm payrolls release provided the central bank with the necessary leeway to move, and the market responded by raising the implied probability of a reduction to almost 90%, according to a CME Group gauge.

In the near future, the central bank will likely be the subject of intense discussion regarding the pace and extent of its actions.

"Joseph LaVorgna, chief economist at SMBC Nikko Securities, advised on CNBC's "Squawk Box" that the Fed should pause on cutting rates after the release of the report, as creating a speculative bubble is a risk they run. Financial conditions have eased massively, he said."

During Donald Trump's first presidential term, LaVorgna, a senior economist, shared his skepticism about a Fed cut with others who could potentially serve in the White House again.

Chris Rupkey, a senior economist at FWDBONDS, stated that the Fed does not need to take measures to stimulate the economy as there are plenty of jobs available. He also pointed out that the central bank's plan to continue lowering interest rates may be unwise as inflation has not been controlled.

Along with LaVorgna on CNBC, Jason Furman, a former White House economist under Barack Obama, also expressed caution, particularly on inflation. Furman pointed out that the recent pace of average hourly earnings increases is more consistent with an inflation rate of 3.5%, not the 2% the Fed prefers.

Furman described the jobs report as another data point in the no-landing scenario, which refers to an economy with growth and inflation.

I am confident that the Fed will cut again, but it is uncertain when they will do so after December. I believe it will require a significant increase in unemployment before they make another move.

Factors in the decision

Policymakers will be faced with a daunting amount of information to sift through before making decisions.

The labor market has been experiencing fluctuations since April, with November's payrolls data showing an increase of 227,000, slightly better than expected and a significant improvement from October's 36,000. Adding the two months together, we get an average of 131,500, which is slightly below the trend.

Despite a slight increase in the unemployment rate to 4.2% and a decline in household employment, the job market remains stable, with payrolls continuing to grow without interruption since December 2020.

There are other factors, though.

Recently, inflation has started to increase, with the Fed's preferred measure rising to 2.3% in October or 2.8% when excluding food and energy prices. Additionally, wage gains have been strong, with the current 4% surpassing the pre-Covid period going back to at least 2008. However, there is a concern about Trump's fiscal policy during his second term and whether his plans to impose punitive tariffs will further stoke inflation.

The broader economy is experiencing robust growth, with the fourth quarter projected to achieve a 3.3% annualized growth rate for gross domestic product, as per the Atlanta Fed.

The Fed's overnight borrowing rate of 4.5%-4.75% is considered "restrictive" by officials, despite financial conditions being at their loosest since January, as measured by the Fed.

This week, Fed Chair Jerome Powell commended the U.S. economy, stating it is the admiration of developed countries and offering a safety net for policymakers to proceed gradually as they adjust their strategies.

Cleveland Fed President Beth Hammack stated that while growth is strong, she requires additional evidence that inflation is moving towards the Fed's 2% target. Hammack recommended that the Fed slow down its rate cut pace. If the Fed proceeds with a December reduction, it will result in a full percentage point decrease since September.

Looking for neutral

Hammack, a voting member of the Federal Open Market Committee, believes that it is time to slow the pace of rate reductions as we approach the point where monetary policy needs to be balanced between maintaining a modestly restrictive stance and the possibility of being near neutral.

The only thing remaining on the agenda that could prevent the Fed from making a December rate cut is the upcoming release of separate reports on consumer and producer prices. The consumer price index is expected to show a 2.7% increase. Following Friday, Fed officials will enter their silent period, during which they will not deliver any policy statements until the meeting.

The "neutral" rate that neither hinders nor stimulates growth is crucial to the Fed's policy conduct. Recent signs suggest that the level may be greater than in past economic conditions.

PFIM Fixed Income's chief U.S. economist, Tom Porcelli, suggested that the Fed could enact the December cut, skip January, and possibly cut once more in early 2025 before taking a break, as traders are anticipating.

"Porcelli stated that he believes Powell will continue to normalize policy because the rates increase in the past was for a different inflation regime than the current one."

Powell and his colleagues are now concentrating on both controlling inflation and bolstering the labor market, with less emphasis on prices.

"It's too late to adjust policy if you wait until you see cracks from a labor market perspective. Prudence suggests starting the process now."