Here’s how I’d think about the December 9–10, 2025 FOMC meeting.
1. What markets are pricing in right now
Based on Fed funds futures (CME FedWatch and similar trackers):
• Odds of a 25 bp cut in December are now roughly one-third (~30–35%).
• Odds the Fed keeps rates unchanged are around two-thirds (~65–70%).
Several outlets report that after the October minutes came out, the implied probability of a December cut fell from about 50% to around one-third, as traders reacted to how divided the committee looks.
So: the market still sees a cut as very possible, but “no move” has become the favored scenario.
2. What the Fed itself is signaling
From the October minutes and recent speeches:
• Minutes from the Oct 28–29 meeting show a clear split:
• Some members are open to another cut “if the data justify it”.
• “Many” would rather hold rates steady for the rest of 2025 because inflation is still above 2%.
• A recent speech by Governor Waller explicitly argued that a December cut could provide “insurance” against a faster weakening in the labor market, moving policy closer to neutral — i.e., he’s leaning dovish.
• Other officials have sounded more hawkish, warning that cutting too fast could lock in inflation that’s been stuck near 3%, and their comments have helped push up the odds of “no change” in December.
Net message:
The Fed is not unified. There is a vocal camp in favor of insurance cuts and a sizable camp saying “we’ve done enough for now.”
3. The data backdrop going into December
Inflation
• Core PCE (the Fed’s favorite gauge) is running just under 3% year-on-year, above the 2% target.
• High-frequency nowcasting (Cleveland Fed) suggests monthly core inflation is running around 0.2–0.3%, which is better than 2022–23, but still not convincingly at the ~0.17% pace consistent with 2% annual inflation.
Labor market
• The Fed’s own description: jobs data show a cooling but not collapsing labor market. The October minutes say the committee is worried about rising downside risks to employment butstill sees inflation as somewhat too high.
• Data have also been messy because of the 43-day federal government shutdown, which disrupted some of the usual labor statistics, adding uncertainty just before the December meeting.
So the macro picture is very “two-handed”:
• Inflation: not an emergency, but clearly not at target.
• Jobs: weakening enough to worry the doves, but not yet a crisis that forces a rescue move.
By the way, although since a 1977 amendment to the Federal Reserve Act, Congress tells the Fed to promote:
• Maximum employment
• Stable prices (low inflation)
• And moderate long-term interest rates
In history, it’s very few times labour market and inflation gave out a perfect window for a rate cut!
Therefore, a deep look into what and how the FED choose between the two (labour market or inflation), might be informative for the choices we can make in the short future!
Here is the history we can see through to get some ideas!
1960s–70s “Great Inflation”: leaned toward jobs, ended up with both problems
In the late 1960s and 1970s, many policymakers and economists believed you could “buy” a permanently lower unemployment rate with a bit more inflation (a naïve view of the Phillips curve).
So when unemployment was high, the Fed was often too easy:
• Under political pressure to keep unemployment down, it let money growth and inflation drift up.
• Result: by the late 1970s, the U.S. had both high inflation and high unemployment — classic stagflation.
Lesson from this era: putting too much weight on the labor market and tolerating inflation backfired; it damaged both goals at once.
1979–early 1980s Volcker era: clearly chose inflation control
Paul Volcker became Fed chair in 1979 and basically said: we have to kill inflation, even if it hurts.
What the Fed did:
• Dramatically tightened policy; short-term interest rates went into the mid- to high-teens.
• This caused two recessions (1980 and 1981–82).
• Unemployment peaked around 10.8% in late 1982.
But inflation fell from double digits to around 4% by 1983, and then stayed much lower for decades.
So here the choice was very explicit:
When forced to choose, the Fed sacrificed employment in the short run to restore price stability.
This episode is now the textbook example of the Fed choosing inflation control over the labor market when the trade-off is brutal.
1990s–2010s: with inflation tamed, more room to favor employment
After Volcker, later chairs (Greenspan, Bernanke, Yellen) benefited from anchored inflation expectations:
• Inflation hovered around 2–3% for long stretches.
• With prices relatively stable, the Fed could run the labor market “hotter” at times without triggering big inflation.
Examples:
• In the 1990s and late 2010s, unemployment fell well below many estimates of its “natural rate,” while inflation stayed modest.
• That let the Fed put more practical weight on employment, because the inflation side didn’t look dangerous.
So in this era, you could say:
The Fed didn’t have to “choose” very often; inflation was calm, so it could be fairly pro-employment.
2020 framework: tilted toward employment, then reversed when inflation surged
In 2020, after years of too-low inflation and the post-2008 zero-rate world, the Fed rewrote its strategy:
• Adopted Flexible Average Inflation Targeting (FAIT): aiming for inflation that averages 2%, and allowing overshoots after undershoots.
• Said it would react to “shortfalls” of employment from maximum levels, not “deviations” both above and below — basically more tolerant of very low unemployment.
This leaned more toward supporting employment and avoiding premature tightening.
Then came the post-COVID surge:
• Big fiscal stimulus + supply shocks + this more tolerant framework → U.S. inflation spiked to multi-decade highs around 2021–22.
• Critics (including a group of former central bankers) argued the Fed’s framework and focus on inclusive/maximum employment made it too slow to tighten, worsening inflation.
The Fed’s response:
• Starting in 2022, it launched an aggressive rate-hiking cycle to bring inflation down, even at the risk of higher unemployment.
• By 2025, it has effectively scaled back or dropped the FAIT language and is moving back toward more traditional, stricter inflation targeting.
So again, the pattern is:
1. Framework and rhetoric tilt toward employment.
2. Inflation becomes a serious problem.
3. Fed pivots back to putting more weight on inflation control.
So, historically, how does the Fed “choose”?
Putting it together:
• Legal mandate:
• Employment and inflation are officially co-equal. No written priority.
• In “normal” times (inflation ~2%):
• The Fed is comfortable being more employment-friendly — letting unemployment fall low, keeping rates relatively supportive.
• In “stress” times (inflation clearly too high and persistent):
• The Fed has repeatedly shown it will prioritize bringing inflation down, even if that means:
• Recessions (early 1980s, arguably the early 2020s tightening), and
• Significant short-term damage to the labor market.
The core philosophy that emerges from all this:
Stable prices are seen as a prerequisite for strong, sustainable employment.
So when the two (that is labour market and inflation control) really clash, the Fed tends to choose inflation control first, betting that’s the best way to protect the labor market over the long run.
4. My prediction for December
Putting it all together:
• My baseline:
• ~60–70% chance the Fed leaves rates unchanged in December.
• ~30–40% chance of a single 25 bp cut.
• Almost no chance of a bigger 50 bp cut unless incoming data are dramatically weaker than expected.
Why I lean “no cut” as the base case:
1. Committee split + still-high inflation
• The minutes make it clear that many members already feel they’re close to the lower bound of how far they can safely cut without risking sticky 3%-ish inflation.
• When a central bank is divided, it usually moves more slowly, not faster.
2. Credibility concerns
• Inflation has been above target for several years. The Fed knows that if it cuts too aggressively while inflation is still ~3%, it risks damaging its “2%” credibility, which they just spent years fighting to rebuild.
3. They already cut in October
• Having delivered another 25 bp in October, they can argue: “We’ve already added support; now we can pause and wait for clearer data.”
When would a cut in December become more likely?
If, between now and the meeting, we get a combination of:
• A clear downside surprise in job growth / unemployment (signs of a sharper slowdown), and
• Soft inflation prints (core PCE and CPI coming in lower than expected),
then the “insurance cut” camp (like Waller) could gain the upper hand, and the odds of a December cut could move closer to 50–50 again.
5. How to think about it if you’re trading/investing
• Short-term rates / front-end yields:
• Base case: pricing drifts toward a December hold, with cuts more heavily priced for early 2026 instead.
• Risk assets (equities, credit):
• A surprise cut in December would likely be taken as near-term positive for risk assets.
• A “hawkish hold” (no cut + tough language on inflation) could pressure high-duration, rate-sensitive names.
• FX (USD):
• No cut + still-firm inflation data = supportive for the dollar.
• A dovish surprise cut, especially with softer inflation, could weaken USD somewhat.
Putting all together, US’s inflation data might be more important than labour market data for the next step!
Stay tuned!