Key Takeaways
- After whipsawing this past month, the bond market suggests the odds of a December Fed interest rate cut stand at roughly 87%.
- Analysts say unusually high division among Fed officials concerning interest rates means the chances of a cut will be lower than the market predicts.
- Fed officials are wrestling with conflicting trends of a cooling job market and sticky inflation, as well as gaps in the data from the government shutdown.
An interest rate cut from the Federal Reserve looks likely at its December meeting, but a muddy economic picture and growing divisions among officials at the central bank mean an easing of policy isn’t a sure thing.
Expectations around the December meeting have swung wildly in recent weeks. Heading into the Dec. 10 policy announcement, bond futures traders are pegging the odds of a quarter-point rate cut at 87%, according to the CME FedWatch tool. But analysts caution that those odds may overstate the case.
Recent public comments from members of the rate-setting Federal Open Market Committee show a highly unusual degree of division among the Fed’s voting members concerning the best path. Some favor further rate cuts to support a cooling labor market and provide a measure of insurance against a possible economic slowdown, while others favor a pause to ensure that inflation—which has fallen dramatically since 2022 but remains above the Fed’s 2% target—does not reaccelerate.
Those divisions mean the relatively high odds of a cut in the bond market may overstate the likelihood of a cut on Dec. 10. “In the end, it’s a much closer call than what market pricing would suggest,” says Ryan Sweet, chief US economist at Oxford Economics. “The committee is clearly divided.”
Central bankers cut rates in September after a long pause, and they cut again at their most recent meeting in October. A December quarter-point cut would bring the target federal-funds rate to a range of 3.50%-3.75%.
Between a Rock and a Hard Place
Analysts aren’t surprised that Fed officials can’t agree. The economic picture is unusually muddy, with some signals pointing to robust growth, upside risks to inflation, and a labor market that’s cooling but stable. Others point to the beginnings of an economic slowdown. “Fed officials will be able to pinpoint certain data points that fit their narrative,” says Sweet of Oxford Economics.
Also complicating the picture are disruptions to official inflation and jobs data stemming from the October government shutdown. Jobs data released late last month showed the unemployment rate rose to 4.4% in September, but central bank officials won’t see more recent government data on the labor market until after their December meeting.
“Much like a sink that hasn’t worked in a long time, it’s old water—data from months ago,” explains Lindsay Rosner, head of multi-sector fixed-income investing at Goldman Sachs Asset Management. “They’re making a call based a dataset that is smaller than and inferior to what they typically have.”
Shifting Expectations
The September jobs data may be old, but Rosner says it “totally changed the mood” on Wall Street when it was released. Bond market expectations for a December rate cut began climbing after data showed a slight uptick in the unemployment rate. The Fed has a dual mandate to maintain maximum employment and low and steady inflation, and inflation data still looks muddy. But in the jobs market, “we got a data point [showing] a cut is in order,” she says. Market expectations for a cut gained rapid momentum after New York Fed President John Williams—who is viewed by many on Wall Street as a close ally of Powell—indicated that further easing could be warranted.
December Interest Rate Cut Not a ‘Foregone Conclusion’
While Powell has been unusually clear that a December cut is not a “forgone conclusion,” many analysts see good reason for the Fed to ease policy once more before 2026 and expect the doves (those who favor cutting rates) to prevail in December’s vote.
Even with the data delays and cloudy outlook, “it seems pretty clear that one more cut in December makes sense,” says Rosner of Goldman Sachs, and that “the risk management exercise has come to a conclusion.” She’ll carefully watch how Powell frames such a cut. Will he signal that there’s more room for adjustment ahead, like Williams, or will he telegraph that this is likely to be the final “insurance” adjustment before an extended pause?
Sweet of Oxford Economics expects a “gametime decision,” driven by Powell and the consensus he can muster among a committee with an unusually wide range of views and differing perceptions of risk.
In a Tuesday research note, Samuel Tombs of Pantheon Macroeconomics wrote that while Powell “might feel about anxious about the market’s certainty,” especially given recent public comments by Fed officials in favor of holding rates steady, he expects the chair to be able to persuade some of those members to vote for another adjustment by offering to signal that the bar for future cuts is very high. That’s what Wall Street calls a “hawkish cut.”
Economists from Bank of America also expect the Fed to cut rates in December, citing the recent uptick in the unemployment rate, citing four key factors. They point to the recent uptick in the unemployment rate, dovish comments from the Williams, weakness in private measures of job growth, and the lack of pushback from Powell on the current market odds of a cut.
Expect Dissent
Regardless of the outcome of December’s meeting, it’s a good bet that the FOMC will remain fractured—potentially even more than in October, when two members dissented in opposite directions, with one favoring a larger rate reduction and the other voting for no rate change at all.
“We anticipate that there will be more dissents in each direction in the December meeting,” says Goldman Sachs’ Rosner.
Bank of America economists expect at least two dissents. “The notion that Powell can’t credibly commit to a pause could make the hawks on the FOMC dig their heels in,” they wrote in a note to clients earlier this week. “They might also worry that any hawkish rhetoric from Powell would lack credibility, given that his hawkishness at the July and October pressers didn’t actually alter the policy path.”
What to Expect from the US Fed in 2026
Many analysts expect the Fed to take a breather next year, especially if the committee votes to cut rates next week. “If it’s more [cuts] now, it’s fewer later,” says Sweet of Oxford Economics. Rates are now within a neutral range, meaning they’re neither accommodative nor restrictive, which signals a likely pause ahead.
Bank of America economists expect just two more rate cuts in 2026, both in the summer. They emphasize that their forecast is based on the upcoming change in leadership at the Fed, rather than current economic conditions.
“It’s an interesting meeting, in that [the current Fed] it is starting to wrap things up from many different perspectives,” says Rosner of Goldman Sachs, pointing to the likely conclusion of the current round of rate cuts and the end of Powell’s tenure as Fed chair in the spring.
Fed officials will release their official “dot plot” of projections for interest rates and the economy as part of December’s meeting, but analysts don’t expect many material changes from September’s projections.
