In this holiday-themed episode of the REconomy Podcast™, Chief Economist Mark Fleming and Deputy Chief Economist Odeta Kushi channel the classic Heat Miser and Snow Miser characters from The Year Without Santa Claus to debate the Federal Reserve’s upcoming December rate decision. From cooling shelter inflation and moderating wage growth to tariff-driven price pressures and a softening labor market, they break down the mixed signals shaping the Fed’s interest rate dilemma. Mark and Odeta make the case why the Fed may lean toward some Heat Miser rate-cut warmth or adopt some Snow Miser restraint heading into 2026.
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“Shelter inflation is on track to decelerate as the data catches up to slower rent growth. And the hires rate is telling you the labor market is vulnerable. Unemployment can drift higher from here if the Fed doesn't ease off the brakes a little bit. So, a small cut in December is Heat Miser's way of saying we've done the hard work. Now let's avoid overdoing it.”
— Odeta Kushi, Deputy Chief Economist, First American
Odeta Kushi - Hello, and welcome to episode 130 of The REconomy Podcast, where we discuss economic issues that impact real estate, housing, and affordability. I'm Odeta Kushi, deputy chief economist at First American, and here with me is Mark Fleming, chief economist at First American. Hey, Mark, we're heading into the holiday season, believe it or not, and because of that, we're going to take inspiration from a movie you reference every single holiday season, The Year Without Santa Claus.
Mark Fleming - Yes!
Odeta Kushi - Specifically, we're going to borrow from your favorite duo, Heat Miser and Snow Miser.
Mark Fleming - Even better. Finally, it's been almost five years now of The REconomy podcast episodes and my claymation moment has finally arrived. But I am wondering, where are we going with this? How exactly are we weaving a ‘70s claymation Christmas classic into a REconomy episode?
Odeta Kushi - I'm so glad you asked. I did have to give it quite a bit of thought. But, if you hadn't heard, the Fed has a rate decision coming up on December 10.
Mark Fleming - I'm sure. Yeah, I've heard, but still claymation Christmas and the Fed. I'm not getting the connection yet.
Odeta Kushi - Well, then you might have also heard that the market has been pretty split on whether we're even getting a rate cut in December. There are reasonable arguments in both directions, so I figured today to lay out those arguments, why not embody the debate? So, you're going to take on the role of economic Heat Miser arguing for a rate cut at the December 10th meeting to heat up the economy. And I will play Snow Miser arguing against a rate cut.
Mark Fleming - Aha! Okay. So, no Debbie Downturn today, but instead, Snow Miser? Like, Snow Miser? Exactly. Exactly.
Odeta Kushi - Yeah, but I mean, is Snow Miser really that different from Debbie Downturn? Now, before we dive in, important disclaimer here, we don't necessarily believe the positions we're about to argue. This really is an exercise in thinking through the data and the risks on both sides. And, on that note, let's just set the stage a little bit before we go to turn up the heat or the snow.
Mark Fleming - Sounds good. So, a quick status check on the economy. So, we're all working from the same baseline. To gauge the health of the economy, we look at GDP growth, which remains pretty solid. Real GDP posted a quarter-over-quarter gain in the second quarter, following a decline in the first quarter. And all indications are that the third quarter will be solid too. Although the average increase over the first half of the year was slower than the average pace of growth throughout 2024. And the labor market has cooled down. There are fewer job openings and hires, wage growth has decelerated from very elevated levels, and job gains have downshifted from their earlier pace. But the unemployment rate is still historically low by any reasonable long-run standard.
Odeta Kushi - That's right. I mean, when it comes to the labor market, we're sort of in this low-hire, low-fire environment. I've heard it called a frozen labor market, and I think that explains it well. I did sneak that in there.
Mark Fleming - No Snow Miser yet. No Snow Miser yet. So, exactly. So, on the economic front, the classic economic dragon, we're not too hot, not too cold. We're pleasantly lukewarm.
Odeta Kushi - That's actually not a thing.
Mark Fleming - It is in Heat Miser's world, of course, but also not to sneak him in too early either. And, on the inflation side, there has been a lot of progress. Headline and core inflation are way down from their 2022 peaks. But on a year-over-year basis, the Fed's preferred personal consumption expenditure, or PCE inflation measure, has been stuck above 2.5 percent. The latest data has it around 2.9 percent, which is now significantly above the Fed's 2 percent target. So, that's our backdrop. Inflation progress has been made, but it remains stubbornly elevated. Growth is slower, but the economy continues to demonstrate resilience and a labor market that's cooler, but by all intents and purposes still intact.
Odeta Kushi - Alright, well we've set the baseline, so now let's turn it over to the Misers. We'll start with Heat Miser first. Why should the Fed cut in December?
Mark Fleming - Thank you, thank you. Queue the trombones and straw boater hats, which by the way, I did have to Google to figure out what to call those hats. Picture me with flaming red hair, curly tipped shoes, and a slightly concerning laugh. Now we've painted a very scary picture.
From Heat Miser's perspective, while inflation is not back to 2 percent, a recent study from the Federal Reserve Bank of St. Louis indicates that the core PCE rate without tariffs would have been…
Odeta Kushi - Yes.
Mark Fleming - …about 2.5 percent instead of the reported 2.9. Some of the recent stickiness in inflation has come from tariffs and goods prices, not from a broad re-acceleration across the entire economy. That's important because tariffs are often seen as a one-time level increase in prices. You raise the tariff, prices jump, and then it's all done and in the base. But unless you keep ratcheting tariffs higher and higher, it's not a source of ongoing inflation. In other words, to borrow from the Fed's lexicon of the early pandemic — remember this — tariff-induced inflation is transitory.
Odeta Kushi - Goodness, there's that transitory again. But you know what? Inflation isn't just about the goods sector.
Mark Fleming - Exactly. That's right. We're mostly a services economy after all. And, on the services side, which is where the Fed has been laser focused, the story is very different from 2022. Services inflation is heavily driven by wages, and wages are heavily influenced by the quits rate. When workers are quitting jobs left and right, they're usually trading up to higher pay and wage growth accelerates. But today the quits rate is down substantially. Workers are staying put. That's a strong signal that wage growth is likely to remain contained and with it, services inflation. So, from Mr. 101's perspective, the underlying engine that would push services inflation higher just isn't running that hot anymore. Then there's shelter. We know that official shelter inflation measures are slow to adjust. They lag what's happening in real-time rents by quite a bit.
New lease rent growth has already cooled substantially from its peak and has slowed to below pre-pandemic average levels. That cooling is slowly working its way into the CPI and PCE shelter components. So, even if these official shelter numbers still look elevated, you can see the future in the rental data. Shelter inflation is going to continue to decelerate. So let's put these pieces together. Tariffs: a one-time transitory price shock. Wages and quits are pointing to limited service-inflation pressure. And shelter inflation is set to slow as it catches up with the rental reality. So, Mr. Green Christmas here sees an inflation outlook that's much more benign than the headline numbers might suggest. And yeah, I am just too much.
Odeta Kushi - Goodness, too much indeed. Okay. I do see your point. Although inflation is only one part of the story. The other half of the Fed's mandate is full employment. If your argument is that the Fed should cut rates, then what you're really saying is that they should look through stubborn inflation and focus on labor-market deterioration.
Mark Fleming - Exactly. The job openings rate has come down. The hiring rate is low and firms are clearly more cautious. This isn't the overheated labor market of 2021 or early 2022 anymore. When the hires rate is this subdued, it is a warning sign. If firms aren't hiring much, then when they do adjust, it's easier for unemployment to drift even higher. You don't need a wave of layoffs. You just need weaker hiring and normal churn, and the jobless rate starts to climb. That's what's happened, actually, this year.
Odeta Kushi - Not to mention that continuing jobless claims are elevated, which is consistent with a labor market characterized by a slow pace of hiring.
Mark Fleming - That's right. And so, from Mr. Heat Miser's perspective, that's the real risk now — not that inflation suddenly re-accelerates, but that the Fed keeps policy too tight for too long and the labor market weakens more than necessary. If the Fed waits until unemployment is clearly rising, then it's already behind the curve.
Odeta Kushi - All right, so let me get this right. Your argument for a cut is that the remaining inflation pressure is mostly about tariffs and lags, not a new broad demand surge.
Mark Fleming - Mm-hmm.
Odeta Kushi - Shelter inflation is on track to decelerate as the data catches up to slower rent growth. And the hires rate is telling you the labor market is vulnerable. Unemployment can drift higher from here if the Fed doesn't ease off the brakes a little bit. So, a small cut in December is Heat Miser's way of saying we've done the hard work. Now let's avoid overdoing it.
Mark Fleming - Yeah, is it getting warm in here? Mr. Heat Miser rests his case.
Odeta Kushi - All right, more trombones and straw-boater hats, please, because Snow Miser is here to throw a little ice on those flames. Now, I actually agree with a lot of your diagnosis. Tariffs are seen as a one-time shock. The quits rate tells us a lot about wage dynamics. And the rental data strongly suggests that shelter inflation will keep cooling over time.
Mark Fleming - There we go.
Odeta Kushi - Those are all reasons to think we're much closer to the end of the dark-inflation night than the beginning. But the Fed has seen false dawns before. And, if the Fed cuts too soon, they risk turning what could have been a one-time bump into a more persistent problem. Even if tariffs are a one-off, they still show up in the headline numbers. The Fed is trying to re-anchor a credibility story that was badly tested in 2021 and 2022. So, from that perspective, cutting into a tariff-boosted inflation reading — even if we think it's transitory — can be a tough communication challenge. And on the labor market, yes, the hiring rate is concerning, and yes, that could translate into higher unemployment if it continues. But from Mr. Icicle's point of view, the question is: has the labor market cooled enough that we need to act right now? Or is there still room to wait for a bit more confirmation that unemployment is actually drifting up, not just at risk of doing so? The economy is also demonstrating resilience, as is the U.S. consumer.
Mark Fleming - Okay, good counterpoints and exactly why the Fed is stuck in a real policy conundrum. Stay put and risk tightening too much, or hit go on another cut too soon and risk reigniting inflation. Dare I say a version of Should I Stay or Should I Go?
Odeta Kushi - You should dare not.
Mark Fleming - And what's extra special about this one is that Should I Stay or Should I Go was actually re-released in 1991. So, decadal hat trick in this episode.
Odeta Kushi - Well, at least you referenced one of my favorite decades here. You're right. These are not right-versus-wrong positions. They are different ways of weighing the same data and risks. Okay, let's do what we do best and connect this whole Fed question back to housing. If the Fed cuts in December, will mortgage rates fall?
Mark Fleming - Exactly. Well, not necessarily, but it does increase the odds that they drift lower or at least stay contained. The federal funds rate is a short-term rate, while mortgage rates are long-term rates, but the Fed's moves influence expectations, volatility, and that all-important mortgage-Treasury spread. If the market sees the cut as a rational response to falling inflation and slower growth, longer-term yields and mortgage rates could be a little lower than they would have otherwise been.
Odeta Kushi - Right, but it's not that simple because sometimes when the Fed cuts, markets worry that the Fed is behind something and longer-term rates don't move in lockstep. It depends on why they cut and how the market interprets it. So, a cut is neither necessary, nor sufficient to guarantee significantly lower mortgage rates.
Mark Fleming - That is so very true. So, if you're still listening to this after all these references to Heat Miser and Snow Miser and you're wondering, okay, but what do I do with this? The answer is you probably don't want your entire housing decision hanging on a single Fed meeting.
Odeta Kushi - Yes, I mean, whether the Fed cuts in December or waits until a later meeting, mortgage rates are still likely to be in a relatively similar range — somewhere in that mid-to-low 6 percent neighborhood for a while, barring a big surprise. We're not talking about going back to 3 percent next week, and we're also not talking about going to 8 percent next week.
Mark Fleming - Yep. The bigger considerations, as always, are your income, your job stability, your time horizon in the home, and what's happening in your local market — local levels of inventory, price trends, and rents.
Odeta Kushi - And, if you're already a homeowner, a lot of your experience is shaped by the fact that your mortgage payment is fixed. Even in a higher-rate world, that stability can be a powerful hedge against inflation over time.
Mark Fleming - You know, I think we need to call in Mother Nature and Mrs. Claus to finally settle this debate between the Brothers Miser.
Odeta Kushi - All right, before you reference every character in this movie, I think we're going to need to close it up for today. Whatever the Fed decides on December 10, we'll be back to unpack what it means for the broader economy and, of course, the housing market. So, thank you for joining us on this episode of The Reconomy Podcast. If you have an economics-related question you'd like us to feature in the future, you can email us at economics@firstam.com. And, as always, if you can’t wait for the next episode, follow us on X — I’m @OdetaKushi, he’s @FlemingEcon. Until next time.
Mark Fleming - I'm Mr. Heat Miser, I'm Mr. Sun. I can't remember the rest of those lyrics — I need to watch it again.
Odeta Kushi - Exactly. Time to rewatch, I guess. Required watching.
Thank you for listening, and we hope you enjoyed this episode of The REconomy Podcast from First American. We're pleased to offer you even more economic content at firstam.com/economics. This episode is copyright 2025 by First American Financial Corporation. All rights reserved.
This transcript has been edited for clarity.