Fed Rate Cut Expectations (December 2025): Market Reactions & AI Sector Implications

A Reddit discussion highlights Federal Reserve Bank of San Francisco President Mary Daly’s surprise support for a December 2025 rate cut, citing fragile labor markets and easing inflation concerns. Key claims from the discussion include an 81% rate cut probability, rate cuts boosting AI investments over job creation, fears of propping up an AI bubble, and panic sell-offs as buying opportunities. Subsequent market data confirms Daly’s dovish stance, with the CME FedWatch Tool showing an 84.9% probability of a 25-basis-point (bp) cut in December, driving sector rotations and modest equity gains.

a. Fed Daly backs a December rate cut due to sudden labor market deterioration and reduced inflation risks [1].
b. CME FedWatch Tool data shows an 84.9% probability of a 25-bp rate cut in December—double last week’s odds [2][3].
c. Energy sector leads market gains (+1.76%), while Healthcare lags (-0.11%) [0].
d. Rate-sensitive sectors like Utilities rise (+1.049%) as long-term Treasury yields fall [0][4].
e. Tech stocks rally on rate cut optimism, though sector gains are modest (+0.149%) [0].

Daly’s dovish comments (along with other officials like Christopher Waller) have sharply increased rate cut expectations. The CME FedWatch Tool’s 84.9% probability reflects market confidence in a December cut, despite ongoing FOMC division [1][2]. This shift is driven by weak labor market signals and easing inflation, which align with Daly’s stated concerns [1].

• Energy
  : Outperformance (+1.76%) likely stems from lower borrowing costs reducing capital expenditure burdens and higher commodity demand expectations under looser monetary policy [0].
• Utilities
  : Gains (+1.049%) reflect their sensitivity to interest rates—lower yields increase the relative attractiveness of their stable dividends [4].
• Tech
  : Modest gains (+0.149%) suggest mixed sentiment: rate cuts support growth valuations, but profit-taking after recent rallies or AI bubble concerns (from the Reddit discussion) may be tempering upside [0][3].

Even with high market probability, FOMC division adds uncertainty. TradingView notes that lagging macro data before the December 10 meeting could shift expectations, highlighting the delicate balance between divergent views within the Fed [2].

• Equities
  : All major U.S. indexes (Dow, S&P 500, Nasdaq) notched four consecutive daily gains as rate cut hopes lifted investor sentiment [3].
• Fixed Income
  : Long-term Treasury yields fell, benefiting bondholders and rate-sensitive sectors [4].
• Currency
  : The U.S. Dollar Index retreated below 99.50 due to reduced yield differentials with other currencies [1].

The Reddit discussion’s claim that rate cuts boost AI investments is partially supported by tech sector gains, but modest performance suggests caution. Energy’s outperformance indicates investors may be rotating to value sectors alongside growth, rather than fully embracing AI-focused plays [0][3].

Panic sell-off scenarios mentioned in the Reddit discussion are not observed yet, as markets are pricing in a rate cut. However, unexpected data (e.g., stronger-than-expected inflation) could trigger volatility [2].

• Market Closure
  : U.S. markets were closed on November 27 for Thanksgiving, leading to thinner liquidity and empty market overview data [0][3].
• Fed Meeting
  : The December 10 FOMC meeting will be the final policy decision of 2025, with Jerome Powell’s commentary likely to shape 2026 market trends [2].
• Sector Rotation
  : Investors are shifting to rate-sensitive sectors (Utilities, Energy) while taking profits in overextended tech stocks [0][3].

a.

: API error (429) prevented retrieval of NVIDIA-specific news, limiting analysis of AI sector reactions.
b. : No granular data on the labor market deterioration cited by Daly [1].
c. : No concrete metrics to validate or refute the Reddit discussion’s AI bubble claim.
d. : Empty data for the Thanksgiving holiday period, missing key index performance details [2].