Fed Daly Backs December 2025 Rate Cut: Implications for AI Investments and Market Dynamics

On November 24, 2025, Federal Reserve Bank of San Francisco President Mary Daly (a close ally of Fed Chair Jerome Powell) explicitly backed a December rate cut, citing a “vulnerable” labor market at risk of sudden deterioration [1]. This announcement caused the CME FedWatch Tool’s probability of a December 25-basis-point rate cut to surge to 81% (up from 71% the prior day) [2]. The timing aligns with a Reddit discussion on the same day that explored the potential impacts on AI investments and market reactions [0].

AI investments—including software, equipment, and data centers—have contributed half of U.S. GDP growth in the first half of 2025 [3]. Lower interest rates reduce borrowing costs, making AI capital expenditures (capex) more attractive for tech companies, which could accelerate this growth trend [0][3]. However, the announcement has amplified existing market debates about whether AI valuations (driven by strong earnings and investor enthusiasm) constitute a bubble, with some concerns that rate cuts could exacerbate overvaluation [5].

The FOMC remains deeply divided, with up to five voting members skeptical of December rate cuts [4]. Daly’s emphasis on labor market vulnerability—likely influenced by delayed data from a 43-day U.S. government shutdown—adds complexity to market reactions: rate cuts are typically supportive, but the labor market warning could signal underlying economic weakness, spooking investors [1][4].

1. Fed Policy as an AI Growth Catalyst
   : Rate cuts directly impact AI investment by lowering capex costs, which is significant given AI’s 50% contribution to 2025 U.S. GDP growth [3].
2. Labor Market Signal Amplifies Uncertainty
   : Daly’s focus on labor market vulnerability frames the rate cut as a defensive measure rather than a purely growth-focused one, creating conflicting narratives for investors.
3. FOMC Divisions Fuel Volatility
   : Deep splits within the Fed mean markets will likely react sharply to each subsequent Fed comment leading up to the December 9-10 meeting [4].
4. AI Valuation Debate Intensifies
   : The rate cut adds fuel to ongoing discussions about whether AI is a secular growth wave or an overvalued bubble [5].

• AI Bubble Concerns
  : Rate cuts could further inflate AI valuations, potentially leading to sharp corrections if investors perceive fundamentals as stretched [5].
• Market Volatility
  : FOMC divisions and conflicting narratives (growth support vs. economic weakness) may increase short-term market swings [4].
• Labor Market Weakness Signal
  : Daly’s emphasis on labor vulnerability could raise broader economic concerns, leading to investor caution [1].

• AI Investment Expansion
  : Lower borrowing costs could enable tech companies to accelerate AI projects, supporting long-term growth [3].
• Buying Opportunities
  : Potential panic sell-offs triggered by labor market concerns could create favorable entry points for investors [0].

• Fed Daly (a Powell ally) backed a December 2025 rate cut on November 24, 2025, citing labor market vulnerability [1].
• The CME FedWatch Tool showed an 81% probability of a December cut following the announcement [2].
• AI investments drove 50% of U.S. GDP growth in H1 2025 [3].
• The FOMC is deeply divided on December rate cuts, with up to five dissenting voting members [4].
• Market reactions are uncertain, with potential for both increased risk appetite and panic sell-offs [0].
• Information gaps include the full transcript of Daly’s interview, specific AI capex impact data, and detailed FOMC dissent details.