Key Takeaways

• Fed casts doubt on December rate cut.
• Data scarcity disrupts decision-making.
• Investors still cling to December rate cut hopes.
• Diminishing returns from stimulus measures.

Despite prior investor hopes for further monetary policy easing, the Federal Reserve's FOMC meeting, concluding Wednesday Eastern Time, revealed increasing uncertainty surrounding future rate cut paths. This stems from data shortages, persistent inflation, and internal divisions within the central bank.

Fed Chairman Jerome Powell surprised markets by questioning the prospect of a rate cut at the next meeting in December, stating it was "not a foregone conclusion," despite the market previously considering it almost certain. Following his remarks, US stocks erased prior gains, and bonds were sold off.

The Fed, as expected, lowered the benchmark interest rate by 25 basis points to a range of 3.75% to 4%, a 150 basis point decrease from last year's peak, and halted its balance sheet reduction program. While these measures are favorable to the market, they had largely been anticipated and priced into asset values.

Data Gaps Disrupt Decision-Making

The US government shutdown has resulted in the unavailability of labor market and other economic data traditionally relied upon by the Fed, casting a shadow over policymakers' decisions and increasing uncertainty for investors.

John Velis, Americas Macro Strategist at BNY Mellon, stated, "The data void will make it very difficult for us to forecast where the Fed will be six weeks from now."

He noted that between now and the December 9-10 meeting, "market pricing for whether or not we get a December rate cut is probably going to be pretty volatile," and "I think that could induce some market volatility."

A weakening labor market prompted the Fed to implement its first rate cut of the year in September 2025, while recent data shows inflation remaining above the Fed's 2% target level.

The latest rate cut decision was opposed by two officials: Fed Governor Miran again called for a greater reduction in borrowing costs, while Kansas City Fed President Schmid argued that rates should not be cut at all, given persistently high inflation.

Investors Still Cling to December Rate Cut Hopes

Jim Caron, Chief Investment Officer of Portfolio Solutions at Morgan Stanley Investment Management, said that the uncertainty Powell injected into a December rate cut could create more doubt in the market about the policy path next year.

Caron stated, "The market hears that and they think, wait a minute... if we're still debating whether we should even cut one more time, how confident can you be that rates are going to be at 3% in 2026?"

However, he added that a slowing labor market could still provide a reasonable basis for a December rate cut: "I don't think that changes the overall trajectory."

Investors still seem to be hoping that the Fed will ease monetary policy at its next policy meeting. According to data from the London Stock Exchange Group (LSEG), US interest rate futures pricing shows a 67.9% probability of another 25 basis point rate cut in December, down from 85% before Powell's remarks. Traders also continue to expect rates to eventually fall to around 3% by the end of next year, consistent with pre-meeting expectations.

Michael Arone, Chief Investment Strategist at State Street Global Advisors, also stated that he still expects the Fed to cut rates in December.

Arone said, "We will eventually get some data, and I expect that data will show a continued weakening in the labor market."

However, some institutions are taking a more skeptical stance.

Bespoke Investment Group said in a report, "We think the hawkishness of this meeting was well beyond what the market was pricing in." They also noted that Powell repeatedly emphasized the heated debate within the Fed, "which provides justification to further discount the odds of a December cut."

Nomura Securities quickly eliminated its expectation for another rate cut by the Fed in December after the Fed announced its October rate decision and Powell's press conference. The firm expects the Fed to cut rates by 25 basis points in March, June, and September of next year, respectively.

Diminishing Returns from Stimulus

Expectations of further easing had previously been driving stocks higher, with the S&P 500 rising for four consecutive trading days before Wednesday's meeting. Matt Rowe, senior portfolio manager at Man Group, said, "Given what just happened, equity valuations now look higher."

Meanwhile, some market participants downplayed the impact of the Fed ending its balance sheet runoff on risk assets.

Amar Reganti, fixed income strategist at Hartford Funds, said that the end of quantitative tightening will only have a slight positive impact on the overall market, partly because the balance sheet reduction process has been very smooth.

Reganti added that if the Fed had taken a more dovish stance on its rate outlook, coupled with the news of ending the balance sheet runoff, "it certainly could have spawned stronger risk-on sentiment," "but that wasn't the case."