Just one week ago, the prospect of a Federal Reserve interest-rate cut in December appeared all but dead. Strong economic data, persistent inflationary signals, and the Fed’s own cautious tone had convinced most of Wall Street that policymakers were firmly committed to keeping rates elevated into early next year. Futures markets had repriced expectations sharply, with traders widely assuming that “higher for longer” remained the dominant script.
But the narrative has now flipped—fast.
As of today, speculators are assigning a 75.5% probability that Fed Chairman Jerome Powell will deliver a rate cut at the December meeting. The sudden swing underscores how quickly sentiment can shift when economic signals soften and policymakers hint at flexibility in their approach.
Below is a deep dive into what changed, why it matters, and what could come next for markets, consumers, and the broader economic landscape.
A Sudden Change in Expectations
Last Week: A December Cut Looked Impossible
Economic reports through mid-November painted a resilient picture:
- The labor market remained stronger than expected
- Wage growth was steady
- Inflation readings—while improving—were not yet at the Fed’s comfort level
Wall Street began to assume that the Fed would stand firm. Futures markets priced in near-zero odds of a December rate cut.
This Week: The Tone Shifts Dramatically
A series of developments triggered the reversal:
- Cooling inflation data: Fresh consumer and producer price indicators showed clear slowing—much faster than anticipated.
- Signs of weakening labor momentum: Job openings eased, hiring cooled, and wage pressure softened.
- Fed speakers hint at easing: Although cautious, several officials—including Powell—acknowledged the possibility that monetary policy may now be sufficiently restrictive.
- Bond markets rallied: Yields dropped significantly, signaling investor confidence that the Fed may need to pivot sooner rather than later.
Together, these dynamics produced a rapid repricing. The market’s implied probability for a December cut flipped from near zero to 75.5%, stunning analysts who had expected a steady glide into 2025 before any meaningful easing.
Why the Federal Reserve May Act in December
1. Inflation Is Cooling Faster Than Expected
The most significant driver is inflation’s downward trajectory. Several key indicators are signaling rapid deceleration:
- CPI components such as shelter costs, used cars, medical services, and goods all softened
- Core PCE—the Fed’s preferred metric—fell toward the 2% target range
The central bank may now feel that it’s winning the inflation battle and can safely ease off the brake.
2. Economic Momentum Is Slowing
While the economy is not in recession, growth is easing:
- Consumer spending is moderating
- Manufacturing remains sluggish
- Lending activity is cooling
- Small business confidence is slipping
A rate cut could serve as a preemptive stabilizer to prevent a sharper downturn.
3. Financial Conditions Are Tight Enough
Bond yields have been falling, but overall financial conditions—credit availability, mortgage rates, corporate borrowing costs—remain historically tight. Powell and the FOMC might view a modest cut as a way to avoid overtightening.
4. Policy Lag Finally Kicking In
The Fed has repeatedly warned that monetary tightening works with long and variable lags. After 11 rate hikes, the effects are now fully permeating the economy. Cutting too late risks unnecessary economic damage.
How Markets Reacted
Stocks Surged
Equities rallied across the board:
- Tech led gains, fueled by expectations of cheaper capital and renewed liquidity
- Financials rose on hopes of improved credit demand
- Real estate and homebuilders surged as mortgage rate relief moved into view
Bond Yields Fell
Treasury yields dropped sharply, with the 10-year returning to levels not seen in months. This is a clear sign that investors believe easing is imminent.
Dollar Weakened
The U.S. dollar slipped as rate-cut expectations rose, boosting commodities and emerging markets.
What This Means for Consumers and Businesses
Mortgage Rates May Ease
A December cut could push 30-year mortgage rates down toward the 6% range—still high, but far better than recent peaks near 8%.
Loans Become More Affordable
Credit cards, auto loans, and business credit lines may gradually soften in cost.
Investment Liquidity Could Improve
Cheaper capital boosts:
- Tech innovation
- Startups
- Corporate expansion plans
- Housing construction
Stock Market Volatility Will Remain High
Despite optimism, uncertainty about inflation, geopolitical risk, and economic slowdown means markets may swing violently depending on incoming data.
What Could Still Prevent a December Rate Cut
The Fed is famously cautious. Several conditions could halt the pivot:
- A surprise spike in November inflation
- Strong jobs data indicating renewed wage pressure
- Re-acceleration in consumer spending
- Fresh geopolitical shocks pushing commodity prices up
Powell will emphasize data dependency up until the final hours before the December meeting.
The Bottom Line
One week ago, a December rate cut seemed like fantasy. Today, it is the base case for most traders.
The Fed appears closer than ever to declaring victory over inflation—and markets are racing to price in a new phase of monetary easing. Whether Powell confirms that shift in December or waits until early 2025 will depend on the data arriving in the next few weeks.
But one thing is clear:
The conversation has changed. The December pivot is very much back on the table.
