Traders Price in 87% Chance of Fed Rate Cut as Dovish Signals Intensify

The U.S. Federal Reserve is now widely expected to deliver a rate cut at its December 10 policy meeting, with a growing number of analysts and traders pricing in the move. Morgan Stanley, which previously forecast a rate hold, now projects a 25-basis-point reduction as dovish signals from Fed officials strengthen. The shift has come amid softer economic data and comments from key policymakers, including New York Fed President John Williams and Governor Christopher Waller, who have suggested a growing emphasis on growth support.

Kevin Hassett, Director of the National Economic Council, has emerged as a leading contender to succeed Jerome Powell as Fed Chair, adding to the anticipation of a more dovish policy stance in the near future. Hassett has openly criticized the Fed's slow response to rate cuts, aligning with market expectations for aggressive easing. A potential confirmation would amplify speculation about faster and deeper rate reductions in 2026, influencing global markets and investor sentiment according to reports.

Traders are already adjusting to a shifting monetary policy landscape. Futures markets now price in an 87.2% chance of a 25-basis-point cut at the December meeting, according to the CME FedWatch tool. Morgan Stanley also revised its 2026 rate path, now expecting a total of 75 basis points of easing by the end of the year, compared to 100 basis points in its previous forecast. The firm noted that Chair Powell may use language changes in the Fed's statement to signal a higher bar for future cuts.

Dovish Policy and Its Market Implications

The expected shift toward easing has had immediate effects on financial markets. . Bond yields have dipped as traders anticipate lower borrowing costs, and equity markets are showing mixed signals ahead of the Fed's decision. The S&P 500 and Nasdaq are slightly higher in pre-meeting trading, while volatility remains elevated, reflecting uncertainty about the Fed's communication strategy.

Investors are also watching how banks and fintechs respond to the lag between policy easing and market pricing. Banks that relied heavily on high-cost funding face margin pressure, while those with long-term fixed-rate assets may see valuation relief as yields fall. Smaller institutions, in particular, are focusing on liquidity and funding stability as they navigate the early phase of the easing cycle according to market analysis.

Risks to the Outlook and Policy Uncertainty

Despite growing expectations for a December cut, challenges remain for the Fed. Inflation, while cooling, is still above the 2% target, and labor market data has been delayed due to the recent government shutdown. The release of key economic indicators, including November employment figures and consumer price data, could reshape the policy path. Goldman Sachs strategists have advised investors to hedge for potential asymmetry in the data, particularly in the labor market according to market forecasts.

Additionally, the political dimension of the Fed chair nomination introduces uncertainty. A more dovish Fed under a Trump-aligned chair could accelerate rate cuts, but it may also raise concerns about central bank independence. Treasury Secretary Scott Bessent has signaled broader reforms, including streamlining the Fed's mission and reducing the influence of regional presidents. These changes could affect how policy decisions are communicated and implemented in the future according to economic analysis.

What This Means for Investors

For investors, the evolving Fed policy and potential changes in leadership mean a more unpredictable market environment. The upcoming rate cut could provide short-term relief for borrowers, but the lag in deposit rate adjustments means that banks may continue to see pressure on net interest margins. Fintechs, by contrast, are maintaining high yields to retain customers, keeping competition intense.

The stock market faces added uncertainty as well. Analysts warn that the traditional "Santa Claus rally" may not materialize this year, given the volatility from AI disruption and geopolitical risks. . Options markets show growing bearish sentiment, with investors buying downside protection rather than relying on seasonal strength.

As the December meeting approaches, markets will closely watch for clues on the Fed's communication strategy and the broader implications for monetary policy in 2026.