Key takeaways
- Markets are almost fully priced for a 25bp cut at the 9–10 December FOMC meeting, taking the Fed funds target range down to 3.50–3.75% from 3.75–4.00%.
- The message may be more hawkish than the move. With inflation still above 2% and policymakers divided, the Fed is likely to stress data-dependence and avoid pre-committing to rapid cuts in 2026.
- For investors, this is less about “pivot euphoria” and more about navigating dispersion, sector rotation, and a world of lower, but still restrictive, rates.
Where we are now
After two rate cuts this year, the Fed funds target range currently stands at 3.75–4.00%, down from the 5.25–5.50% peak reached in 2023.
The macro backdrop going into the December 9–10 meeting looks like this:
- Growth: The US economy has cooled from 2024’s strong pace, with signs of softer hiring and weaker private payrolls, even as layoffs remain relatively contained.
- Inflation: Headline inflation has fallen sharply, but core measures remain above the Fed’s 2% target, and consensus expects inflation to stay above target through 2027.
- Labour market: A “low-fire, low-hire” environment – fewer new jobs, but still no collapse – gives the Fed room to ease, but not to declare mission accomplished.
- Financial conditions: Bond yields have come off their highs, mortgage rates have fallen toward the low 6% area, and risk assets have staged a broad rally.
This mix explains why markets are pushing for further cuts, even as the Fed remains cautious.
What markets are pricing in
Fed fund futures and tools such as CME FedWatch show markets assigning around 85–90% probability to a 25bp cut at the December meeting.
Beyond December, markets are pricing around 75–90bp of total cuts into late-2026, effectively assuming a gentle but persistent easing cycle.
The risk for markets is not whether the Fed cuts once in December – that’s largely in the price – but how strongly policymakers push back against the idea of a long, uninterrupted cutting cycle.
Our base case: A “careful cut”
1. 25bp cut to 3.50–3.75% – but with a cautious tone
The most likely outcome is a 25bp cut alongside language that:
- Acknowledges progress on inflation and signs of labour-market cooling;
- Emphasises “data-dependence” and the need to see more evidence before moving aggressively;
- Signals that policy is shifting from “restrictive and rising” to “restrictive but gently easing.”
In this scenario, the Fed seeks to:
- Support growth and employment after a long period of tight policy;
- Avoid reigniting inflation by validating the idea of very rapid cuts;
- Keep optionality for 2026, especially given uncertainties around tariffs, fiscal policy and global growth.
2. Risks around the base case
There are two key alternative scenarios investors should keep on the radar:
Dovish hold (low probability, high impact)
- The Fed surprises by leaving rates unchanged, citing sticky core inflation or concern over financial conditions becoming too loose.
- Markets would likely respond with higher yields, a stronger dollar, and pressure on rate-sensitive assets (growth stocks, EM, precious metals).
Dovish cut (lower probability, but supportive for risk)
- The Fed not only cuts but hints at further near-term easing or marks dot-plot projections down more aggressively.
- This would probably weaken the dollar further, compress yields and extend the rally in gold, silver and higher-beta risk assets – but at the cost of raising questions about the growth outlook and policy credibility.
Given current Fed communication, the balance of probabilities favours a “careful cut” rather than a full pivot.
What this could mean across major asset classes
(For information purposes only; not a recommendation to buy or sell any instrument.)
1. Bonds: lower yields, but not a straight line
- A December cut should reinforce the downtrend in short-dated yields, but longer maturities may oscillate between growth fears and term-premium concerns.
- If the Fed pushes back against aggressive 2026 cut expectations, the yield curve may re-steepen bearishly (long yields up relative to short).
Key risk:
- A hawkish surprise or stronger-than-expected inflation data could trigger a sharp back-up in yields from already lower levels.
2. Equities: dispersion results in wider leadership, rather than a simple “buy everything”
- Lower rates support valuations, especially for long-duration growth segments, but the benefits will be uneven across sectors.
- Expect continued rotation within the US market, with small and mid caps gaining from cheaper financing, valuation relief and a potential domestic-demand lift.
- Tech leadership is likely to continue to broaden toward less crowded, more earnings-driven parts of the AI ecosystem, rather than relying solely on mega-caps.
- Other rate-sensitive sectors such as real estate may also find support, though excess supply in pockets of the office segment remains a clear overhang.
- As cash shifts out of high-yielding deposits and money-market funds, yield-oriented equity plays—dividend growers, utilities and infrastructure names—could move back into focus, provided fundamentals remain solid.
- Select emerging markets could also benefit from a softer dollar and easing US financial conditions, though dispersion is high and country-specific fundamentals will matter far more.
- In a maturing cycle, markets tend to reward quality balance sheets, earnings resilience and stable cash flows—reinforcing the case for selectivity over broad beta exposure.
Key risk:
- If the Fed sounds more worried about growth than markets expect, the tone could shift from “Goldilocks” to “growth scare”, pressuring cyclicals even as rates fall.
3. US dollar and FX
- A well-telegraphed 25bp cut is largely priced in and may not trigger a dramatic dollar reaction on its own.
- The bigger swing factor is guidance for 2026:
- Strong pushback on aggressive cuts could give the USD a short-term lift, especially versus low-yielders.
- A more dovish tone could extend the drift lower in the dollar and support higher-beta FX and selected EM currencies.
Key risk:
- Any hint that future Fed leadership could favour very loose policy, or that politics is encroaching on Fed independence, would add another layer of volatility.
4. Gold, silver and commodities
- Gold is trading near record levels and has already reacted positively to the broader easing cycle and real-yield downtrend.
- A cautious cut that doesn’t derail the easing narrative should keep structural support under precious metals, but short-term volatility is likely given crowded positioning.
- Silver’s run has been even more dramatic, amplifying both upside and downside moves around Fed events.
Key risk:
- A hawkish surprise – or a sudden rise in real yields – could trigger deeper corrections in both metals, even if the long-term case on de-dollarisation, fiscal deficits and energy transition remains intact.
Final thoughts
The December FOMC is unlikely to deliver a policy shock – a 25bp cut is widely expected – but it could still mark an important psychological shift. The Fed is moving away from its post-pandemic emergency stance, yet is not ready to underwrite a rapid return to ultra-easy money.
For investors, that means:
- Less focus on the exact number of cuts, more focus on the path of growth, inflation and dispersion across markets;
- A world where rates are falling but still restrictive, and where policy uncertainty remains high;
- An environment that continues to reward selectivity, risk management and genuine diversification over simple index-tracking.
