December Fed Rate Cut Odds: Why Expectations Are Shifting
Investor expectations for a Federal Reserve rate cut in December have shifted sharply in recent days, driven by softer economic data, a notable change in tone from Fed officials, and evolving market sentiment around inflation. Futures markets now imply a significantly higher probability of an initial policy easing at the December meeting, marking one of the most substantial repricings since late summer.
Market-Implied Odds Are Rising
As of this morning, interest rate futures tracked by the CME FedWatch Tool show that traders are assigning a markedly higher probability to a December rate cut compared with just one week ago. According to the latest CME FedWatch data (source), the odds of a 25‑basis‑point cut have climbed into the roughly 60–70 percent range, depending on the tenor of the contract.
This shift represents a broad move across Treasury yields as well. The two-year yield—typically the most sensitive to Fed expectations—has slipped meaningfully over the past several sessions, reinforcing investor conviction that monetary easing may begin before year‑end.
What’s Driving the Change?
Softer Economic Data
Recent economic releases have suggested a moderating U.S. economy. Key indicators include:
- Slowing labor market momentum in monthly payroll and job openings data
- Cooling consumer spending indicators
- Signs of easing price pressures in both CPI and PCE inflation reports
The latest Personal Consumption Expenditures (PCE) inflation reading showed continued disinflation, with core PCE trending steadily toward the Fed’s 2 percent target (Bureau of Economic Analysis). This has reinforced views that the Fed is gaining confidence in inflation’s downward trajectory.
Fed Communications Turning More Dovish
Investor sentiment shifted sharply after comments from New York Fed President John Williams, who indicated the FOMC is “prepared to adjust policy as needed,” a phrasing that many analysts interpreted as a signal that rate cuts are under active consideration. Reuters highlighted that markets reacted strongly to this shift in tone (Reuters).
While the Fed has avoided committing to a firm timeline, the change in language—from strictly restrictive messaging to a more flexible stance—has played a major role in repricing expectations.
Global Macro Dynamics
Broader conditions are also contributing: