FedWatch December Rate Cut Probability Jumps to 70%: Market Impact and Risk Analysis

The FedWatch Tool probability for a December 25bp rate cut surged from ~39% to over70% on November21,2025 [1][2]. This shift was triggered by NY Fed President John Williams’ comments on “room for further adjustment” [4][5] and an uptick in the unemployment rate [3][6]. Market indices reacted positively: Russell2000 (+2.72%), Dow (+0.95%), S&P500 (+0.72%), NASDAQ (+0.50%) [8]. Cyclical sectors (Healthcare +1.73%, Industrials +1.52%) outperformed, while Utilities (-0.88%)—a bond proxy—underperformed as investors shifted to riskier assets [9]. U.S. Treasury yields fell: 2-year (-5.1bps to3.508%),10-year (-4.1bps to4.063%) [4][10]. Conflicting signals exist: JP Morgan and Morgan Stanley withdrew December cut forecasts [6][7].

1. Small-cap stocks (Russell2000) benefited most from rate-cut expectations due to higher sensitivity to borrowing costs [8].
2. Utilities’ underperformance reflects investor rotation from defensive to riskier assets amid rate-cut hopes [9].
3. Data gaps from the government shutdown (delayed inflation data) increase policy uncertainty and market volatility risk [3][6].

• Risks
  : Expectation misalignment (70% probability priced in vs some banks’ no-cut forecasts) could lead to sharp corrections if the Fed holds rates [6][11]. Data uncertainty may amplify volatility as delayed reports are released [3][6].
• Opportunities
  : Cyclical sectors (Healthcare, Industrials) may continue to gain if rate-cut expectations persist [9].

The FedWatch jump signals heightened market expectations for a December rate cut, driven by Fed communication and labor data. However, conflicting analyst views and incomplete economic data (due to shutdown) warrant caution. Investors should monitor upcoming inflation data and Fed officials’ comments for clarity.