Federal Reserve December Rate Cut Analysis: 64% Probability and Market Implications

This analysis is based on market discussion from November 11, 2025, highlighting CME FedWatch data showing a 64% probability of a 25-basis point rate cut at the Federal Reserve’s December meeting [3][4][5]. The probability has fluctuated between 58-70% in recent days, reflecting market uncertainty about the Fed’s next move amid mixed earnings, cooling inflation, and concerns that markets may have already priced in the expected cut. Current market performance shows sector rotation favoring rate-sensitive stocks over growth sectors, with the Dow Jones outperforming while the NASDAQ lags.

: The unemployment rate has risen to 4.3% in August 2025, the highest level since October 2021 [7]. Chicago Fed indicators show layoffs increasing to 2.10% in October 2025 [8], signaling broader labor market weakness that typically supports monetary easing. Labor market showing “warning signs” with decelerating job growth and rising layoffs [6].

: Annual inflation stands at 3.0% in September 2025, up from 2.9% in August [7], while core PCE remains at 3.0% year-over-year, still above the Fed’s 2% target [6]. However, short-term inflation expectations have declined according to NY Fed survey data [6], suggesting inflation pressures may be moderating despite the recent uptick.

: The current federal funds rate sits at 3.75%-4.00% after September and October 2025 cuts [6]. Fed Governor Stephen Miran has emerged as a key dovish voice, advocating for a 50-basis point cut in December and calling it “appropriate” [4][5]. Miran has dissented at both September and October FOMC meetings, favoring larger cuts [5], indicating internal policy disagreement.

: Major indices show mixed performance as of November 12, 2025, with the S&P 500 down 0.32% to 6,846.07, NASDAQ down 0.85% to 23,363.69, Dow Jones up 0.57% to 48,287.32, and Russell 2000 down 0.14% to 2,459.88 [0]. This divergence between Dow Jones strength and tech-heavy NASDAQ weakness suggests sector rotation related to rate cut expectations.

: Rate-sensitive sectors are outperforming growth sectors, with Healthcare +0.60%, Real Estate +0.44%, while Technology -1.35%, Consumer Cyclical -1.41%, and Energy -1.26% [0]. This pattern aligns with expectations of monetary easing benefiting traditional industries over growth stocks.

The 64% probability figure reflects a complex interplay of factors including weakening labor markets [6][7][8], Governor Miran’s dovish stance [4][5], concerns about economic slowdown [3], and technical factors in futures market positioning. As noted in the original discussion, there are concerns that markets may have already fully priced in a 25-bp cut, potentially limiting upside potential if the cut materializes.

1. Policy-Driven Sector Rotation
   : The divergence between Dow Jones outperformance (+0.57%) and NASDAQ underperformance (-0.85%) [0] directly correlates with rate cut expectations, demonstrating how monetary policy expectations are driving sector allocation decisions.

2. Fed Internal Disagreement
   : Governor Miran’s consistent dissent for larger cuts [5] versus the market’s 64% probability for a 25-bp cut suggests the Fed may be more divided than official statements indicate, creating policy uncertainty.

3. Inflation-Labor Market Divergence
   : While inflation has ticked up to 3.0% [7], labor market deterioration [8] continues, creating conflicting signals for policymakers that could lead to more volatile market reactions around the December decision.

1. Asymmetric Risk Profile
   : With markets potentially having already priced in a 25-bp cut, the risk-reward dynamics may be asymmetric - limited upside if the cut occurs, but significant downside if the Fed holds rates steady or cuts less than expected.

2. Economic Data Lag
   : The analysis relies on September inflation data and August unemployment data [7], meaning the Fed will be making decisions with potentially outdated information, especially given the government shutdown impact on data collection [8].

3. Policy Credibility at Stake
   : The Fed’s ability to manage expectations while dealing with internal disagreements and external shocks (government shutdown affecting up to 750,000 workers [8]) will be crucial for maintaining policy credibility.

1. Inflation Re-acceleration Risk
   : The September uptick to 3.0% inflation [7] could complicate easing decisions if this trend continues, potentially forcing the Fed to maintain a more hawkish stance than markets expect.

2. Labor Market Deterioration
   : Rising unemployment to 4.3% [7] and increasing layoffs [8] may signal deeper economic weakness than currently appreciated, potentially requiring more aggressive policy response.

3. Policy Uncertainty
   : Governor Miran’s dissent [5] suggests significant internal disagreement about appropriate policy stance, increasing the probability of unexpected policy outcomes.

4. Government Shutdown Impact
   : Up to 750,000 federal workers furloughed [8] are affecting economic data collection and consumer confidence, potentially distorting the information the Fed uses for decision-making.

1. Priced-In Expectations
   : As noted in the original discussion, markets may have already fully priced in a 25-bp cut, creating asymmetric risk where disappointment could trigger significant downside.

2. Sector Rotation Opportunity
   : Continued outperformance of rate-sensitive sectors (Real Estate, Healthcare) [0] could persist if rate cut expectations strengthen, though this trend could reverse quickly if expectations change.

3. Volatility Risk
   : Mixed earnings and economic uncertainty could increase market volatility around the December decision, particularly for growth stocks that have underperformed [0].

1. Upcoming Data Releases
   : October CPI (mid-November), October jobs report, Q4 GDP estimates will be crucial for shaping expectations.

2. Fed Communications
   : Additional speeches from FOMC members, especially those not aligned with Miran’s dovish stance, will provide insight into internal consensus.

3. Financial Conditions
   : Credit market stress indicators and bank lending standards will help gauge the broader economic impact of current policy.

4. Global Factors
   : International economic developments and commodity price trends could influence the Fed’s decision-making process.

The 64% probability of a December rate cut reflects market expectations based on weakening labor markets, moderating inflation expectations, and dovish Fed communications. Current market performance shows sector rotation favoring rate-sensitive stocks, with Healthcare (+0.60%) and Real Estate (+0.44%) outperforming Technology (-1.35%) and Consumer Cyclical (-1.41%) [0]. The federal funds rate currently stands at 3.75%-4.00% after September and October cuts [6], with Governor Miran advocating for a 50-bp cut [4][5].

Critical data gaps include October CPI and jobs reports, with current analysis relying on September inflation (3.0%) and August unemployment (4.3%) data [7]. The government shutdown affecting up to 750,000 workers [8] adds uncertainty to data reliability and economic outlook. Markets may have already priced in the expected 25-bp cut, creating asymmetric risk profiles where disappointment could trigger significant market reactions.

The Fed faces conflicting signals with inflation ticking up while labor markets deteriorate, and internal disagreements about appropriate policy response. Upcoming data releases and Fed communications will be crucial for clarifying expectations ahead of the December meeting.