Current market expectations
1. Probability of a 25 basis point rate cut in December
- 89%-92%: CME's "FedWatch" and other mainstream forecasting tools show that the probability of a 25 basis point rate cut in December remained above 89% from December 3rd to 4th, peaking at 92%.
- Probability of maintaining the current interest rate: only 8%-11%, the market almost rules out the possibility of a rate hike (probability <1%).
2. Future interest rate cut path
- January 2026: The probability of a cumulative 25 basis point rate cut is 64.8%, and the probability of a cumulative 50 basis point rate cut is 27.6%.
- Full year 2026: Bank of America predicts that the Federal Reserve may cut rates twice more in June and July, ultimately lowering the rate to 3.00%-3.25%.
Core factors supporting rate cut expectations
1. Economic data signals
- Weak labor market: In November, ADP employment unexpectedly decreased by 32,000 (expected an increase of 10,000), and the unemployment rate rose to 4.4%, close to the Federal Reserve's year-end target (4.5%).
- Inflation contradiction: Despite strong economic activity, inflation is deviating from targets, and policy needs to balance employment and price stability.
2. Internal movements at the Federal Reserve
- Dovish statements from officials: New York Fed President Williams publicly supports a rate cut in December, with the market believing Powell aligns with this stance.
- Impact of personnel changes: Trump plans to nominate a new Federal Reserve Chair in early 2026, with White House economic advisor Hassett (who advocates aggressive rate cuts) becoming a popular candidate, intensifying market easing expectations.
3. Political pressure
- Trump continues to pressure the Federal Reserve to cut rates and publicly criticizes Powell for being 'too slow to act,' threatening his reappointment prospects.
️ Potential risks and divergences
- Internal divergences within the FOMC: Kansas City Fed President George and St. Louis Fed President Bullard may oppose rate cuts, believing that 'further easing space is limited.'
- Risk of missing data: The U.S. government shutdown has led to delays in the release of some economic data (e.g., October durable goods data postponed to December 23), increasing policy uncertainty.
Summary
A December rate cut seems almost certain: nearly 90% probability, with an expected cut of 25 basis points.
Divergence in the 2026 path: The market is fiercely contesting the pace of future interest rate cuts, requiring attention to changes in Federal Reserve personnel and the resilience of economic data.
Short-term market impact: Expectations of interest rate cuts have driven up U.S. stocks (especially tech stocks) and the cryptocurrency market, and if realized, could further boost risk assets.
