The Federal Reserve’s December 9–10, 2025 meeting has shifted from a near-lock for another rate cut to one of the most uncertain policy decisions of the year. After cutting rates twice—in September and October—the Fed now faces intense internal division over whether to deliver a third consecutive cut or pause to reassess inflation pressures.

This uncertainty has created elevated volatility across rate-sensitive sectors, with futures markets now pricing the December meeting as a true 50-50 coin flip.

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December Rate Cut Odds Collapse From 90% to 50%

According to the CME FedWatch Tool, the probability of a December cut has plunged from over 90% last month to roughly 50–55% today, marking one of the steepest shifts in rate expectations in recent years.

Current futures pricing suggests:

• ~60% probability the Fed holds rates at 3.75%–4.00%
• ~40% probability of a 25 bps cut to 3.50%–3.75%

This swing reflects growing disagreement inside the Fed, conflicting economic data, and unusually limited visibility into Q4 conditions due to the government data blackout.

🔗 Track real-time probabilities: CME Fed Watch Tool

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What Changed? Powell’s Tone Turned Cautious

Fed Chair Jerome Powell surprised markets at the October 29 press conference, warning that a December rate cut is “not a foregone conclusion” and revealing “strongly differing views” within the FOMC.

This is a stark shift from the September guidance, which projected three total cuts for 2025.

Powell emphasized:

• A growing group of Fed officials want to “wait a cycle”
• The committee is split on inflation risk
• There is no consensus on whether additional cuts are appropriate

This level of public division is highly unusual for the historically consensus-driven Fed.

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Inflation Is the Biggest Obstacle to a December Cut

Despite progress in the past year, inflation remains above the Fed’s 2% target, and several components are re-accelerating.

Recent data shows:

• Core PCE: 2.7% YoY
• Electricity & health care costs: rising
• Insurance premiums: climbing
• Tariff-related inflation: feeding into broader categories

Kansas City Fed President Jeff Schmid, who dissented in October, warned that cutting again risks “cementing higher inflation” at a time when businesses continue reporting persistent price pressures.

His message: inflation is not fully under control.

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Softening Labor Market Complicates the Decision

While inflation pressures persist, the labor market is sending the opposite signal.

Recent trends include:

• Slowing job gains throughout 2025
• Unemployment rate ticking higher
• Increase in initial jobless claims
• Rising corporate layoff announcements
• Weak small-business hiring plans

This puts the Fed in a difficult position:
Should it support employment with another cut — or defend the inflation target by holding steady?

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Fed Division Reaches a Rare Peak

The October meeting featured an unusual split:

• Governor Stephen Miran wanted a 50 bps cut (more aggressive easing)
• President Jeff Schmid wanted no cut (inflation concerns)

Powell confirmed the committee is deeply divided on the December path. Such open disagreement is rare and signals a highly uncertain policy environment.

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Data Blackout Adds Major Uncertainty

The federal government shutdown has created a data gap not seen in modern rate-setting history.

Key data releases were halted, meaning:

• The Fed has less visibility into Q4 trends
• Some October data may never be released
• Policymakers are relying on private sector data and anecdotes

This raises the risk that the Fed could misread the economy, making officials more cautious about cutting too aggressively.

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What This Means for Markets and Traders

Rate-sensitive sectors have already reacted:

Sectors Under Pressure

• REITs: down 2–4% since late October
• Small-cap stocks lagging
• Utilities underperforming

Sectors Benefiting

• Banks & financials (improved NIM)
• Money market funds (5%+ yields)
• U.S. dollar strengthening

Treasury Market Reaction

• 10-year yields holding near 4.09%
• Yield curve pricing fewer 2026 cuts
• Terminal rate expectations shifting higher

Markets are effectively pre-positioning for either outcome.

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December Rate Decision: Likely Scenarios

Scenario 1: 25 bps Cut (45–50% probability)

Would require:

• Weak November jobs report
• Inflation showing clear deceleration

Market reaction:

• Growth stocks rally
• REITs bounce
• Dollar weakens
• Long-duration assets outperform

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Scenario 2: Hold Rates Steady (50–55% probability)

Would align with current Fed messaging.

Market reaction:

• Initial equity pullback
• Financials outperform
• Short-term yields rise
• Dollar strengthens

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Scenario 3: Hawkish Hold (Low probability)

Would signal an extended pause into Q1 2026.

Market reaction:

• Sharp market correction
• Strong dollar
• More volatility into year-end

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Key Data to Watch Before the December Meeting

1. November Jobs Report (Dec 6)

Consensus: 180K jobs
Impact:

• Below 150K → strengthens case for a cut
• Above 200K → likely eliminates December cut

2. November CPI (Dec 11)

After the meeting — affects January path.

3. Fedspeak before blackout (through Dec 6)

Any hawkish or dovish tone shift may move markets.

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Looking Ahead to 2026

Even if the Fed cuts in December, most major institutions expect a slower easing cycle next year.

• Goldman Sachs: Two cuts (Mar + Jun 2026)
• BlackRock: Fed funds at 3.4% by end of 2026
• Morgan Stanley: Q1 2026 pause likely

The Fed’s decision to end QT on December 1 effectively adds extra liquidity — a subtle easing measure regardless of the rate outcome.

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The Bottom Line

The December Fed meeting has evolved into one of the most uncertain policy decisions of the year. Inflation remains sticky, the labor market is softening, and internal Fed disagreement is unusually high.

For traders, this environment creates significant opportunity — but also elevated risk.

What to Do Now

• Monitor CME FedWatch Tool daily
• Track November jobs data (Dec 6)
• Prepare for rate-sensitive sector volatility
• Consider hedging ahead of the announcement
• Expect sharp moves on December 10 regardless of outcome

The Fed’s December decision will shape the market’s trajectory into 2026 — and with the FOMC more divided than ever, the path forward is anything but certain.

Track probabilities in real-time: CME FedWatch Tool