Markets rethink December rate cut amid Fed doubts

Federal Reserve Chair Jerome Powell wasn’t kidding a couple weeks ago when he said a December rate cut wasn’t in the bag.

Recent remarks from Powell’s colleagues point to plenty of apprehension over whether the central bank should deliver its third consecutive easing of policy when it meets Dec. 9-10.

As a result, markets have recalibrated their expectations. Whereas traders as recently as a few days ago were pricing in at least a 2-to-1 probability of a quarter percentage point cut, that’s now flipped to a coin toss, according to futures markets readings tabulated by the CME Group in its FedWatch tool.

“These developments chip away at our confidence the Fed will cut in [December] without giving us any more confidence a skip to [January] is a better bet,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a note. “This leaves us still seeing a [December] cut more likely than not but only 55-60 per cent.”

As of Thursday afternoon, the implied probability of a rate cut was at 49.4%, according to the CME gauge that uses prices on 30-day fed funds futures contracts to interpolate probabilities for rate moves. Futures prices pointed to a funds rate of 3.775% by the end of 2025, compared to the current level of 3.87%.

A month ago, the market was assigning a 95% probability of a reduction.

So what changed? Primarily, uncertainty at a time when the official data flow came to a halt due to the now-resolved government shutdown. Some Fed officials worry about flying blind on data at a time when the most recent readings point to a softening labor market but inflation that, while ebbing slightly, is still considerably above the Fed’s 2% target. Moreover, White House press secretary Karoline Leavitt said Wednesday that some of the data, particularly for October, may never come out.

An unexpected voice

Those reservations showed up in an uncharacteristically blunt assessment Wednesday from Boston Fed President Susan Collins.

During her time with the Fed, Collins has used cautious language to express her opinion on policy. But a speech she delivered in her home district left little doubt regarding her misgivings about inflation and the importance of the Fed to hold steady, at least for now, until there’s greater economic clarity.

“Given my baseline outlook, it will likely be appropriate to keep policy rates at the current level for some time to balance the inflation and employment risks in this highly uncertain environment,” Collins said. “I see several reasons to have a relatively high bar for additional easing in the near term.”

A central part of her case is that the economy generally looks solid even with the slowdown in hiring. Cutting rates more, Collins reasoned, risks pushing inflation higher at a time when the impact from…