December Rate Cut: Is One Enough Amid Risk and Uncertainty?

The Federal Reserve's internal debate over rate cuts continues to diverge from market pricing. The September 2025 Summary of Economic Projections (SEP) shows median officials expect the federal funds rate to fall to 3.6% by year-end 2025-just one cut from June's 3.9%-before easing further to 3.1% by 2028. According to the SEP, this cautious path assumes inflation will gradually retreat to 2% by 2028 while growth remains near 1.6% in 2025.

Markets, however, price in a much looser stance. The CME FedWatch tool suggests an 85% probability of a December 2025 rate cut, while economists surveyed by Reuters see an 82% chance of action at the December meeting. Both groups also anticipate two additional cuts in 2026, targeting a range of 3.00%-3.25%. This disconnect reflects investor confidence in soft data-business surveys and revised jobs reports signaling labor market fragility-contrasting with the Fed's reliance on a limited dataset.

A critical uncertainty looms: October's CPI and jobs data remain unavailable due to a government shutdown, forcing policymakers and markets to lean on preliminary indicators. Governor Waller has warned that incomplete data obscures risks to both inflation and employment, creating a "policy blind spot." Without October's hard numbers, the Fed's ability to calibrate rate moves hinges on fragmented signals, increasing the chance of misjudged policy timing.

As the November meeting approaches, the gap between official projections and market pricing underscores deeper uncertainty-setting the stage for potential downside risks tied to delayed data and shifting economic momentum.

Downside Risks to One-Cut Adequacy

A single December rate cut faces significant headwinds, raising doubts about its sufficiency to steer the economy safely. Core inflation remains stubbornly elevated at 3.0%, well above the Fed's 2% target and indicating persistent price pressures beyond energy and food.

. This core strength suggests the disinflation process is incomplete.

Compounding this, consumer inflation expectations hover near 4% according to Reuters, reflecting a potential risk of inflation becoming entrenched in public perception. If households and businesses act on these expectations, wage pressures could build, further complicating the Fed's balancing act. Furthermore, the latest revised Q3 GDP growth figure of just 1.6% signals ongoing economic fragility and insufficient momentum, raising concerns that a single easing move may be too timid to meaningfully support activity.

External risks amplify the uncertainty surrounding a single cut. Significant fiscal policy uncertainty looms, driven by potential tax cuts and tariffs that could reignite inflationary pressures or create economic distortions. This domestic policy ambiguity exists alongside global economic divergence, adding another layer of complexity to monetary policy decisions. Additionally, critical economic data, including November CPI and December unemployment figures, remains incomplete due to a government shutdown, creating substantial blind spots for policymakers. This lack of timely, reliable information makes risk management far more difficult.

Consequently, while a December cut is expected by markets, its adequacy is questionable. The combination of persistently high core inflation, entrenched consumer expectations, weak growth signals, fiscal policy ambiguity, global divergence, and a data blackout period strongly suggests that a single move may not provide the necessary insurance against downside risks or sufficiently counterbalance the upside inflation pressures.

Catalystysts to Test Cut Adequacy

The adequacy of a potential December rate cut hinges on upcoming data and policy signals. The market currently prices in an 85% probability of a cut, according to CME FedWatch, but this could shift based on what emerges. The December 2025 FOMC SEP will offer official forecasts, with median participants expecting rates to reach 3.00-3.25% by 2026. However, a data blackout period has been created by missing October employment and CPI data from a government shutdown, delaying fresh information and increasing uncertainty.

The November CPI release, scheduled for late December, will be crucial for inflation assessment. While its exact timing isn't fixed, the Bureau of Labor Statistics typically updates release dates at least a week in advance. December jobs data will reflect labor market health, but revisions or delays are possible due to the shutdown. Fed speeches from officials like Christopher Waller will reveal their stances; Waller, for instance, supports a cut to address a weak labor market near "stall speed" according to Waller's speech.

Despite the high market probability, internal divisions persist. Hawks warn against premature action amid inflation risks, while doves emphasize labor market fragility. This tension could amplify volatility, with equity sectors like tech potentially benefiting from lower rates, but currency pairs like USD/JPY facing uncertainty. The data blackout means traders must rely on private-sector indicators, heightening risks for those betting on a cut.

In summary, while the 85% probability and 2026 dot plot suggest a dovish path, the data blackout and lack of hard data could challenge assumptions. Investors should monitor speeches and delayed releases closely, as conditions may shift rapidly.

Risk Defense Investment Implications

Market pricing now heavily favors a December Fed rate cut, with the CME FedWatch tool indicating an 85% probability for a move at the December 9-10 meeting. This optimism is reinforced by Reuters economist surveys showing an 82% expected cut, aligning closely with the market implied chance according to Reuters. However, this probability reflects significant internal FOMC division, with prominent officials like Governor Waller advocating for easing due to labor market fragility near "stall speed" according to Waller's speech, while hawks like Susan Collins warn against premature action amid persistent inflation risks.

The September 2025 FOMC Summary of Economic Projections (SEP) provides crucial context for longer-term expectations. The median participant now forecasts two additional rate cuts beyond December, projecting the target range to reach 3.00-3.25% by 2026. This downward trajectory assumes inflation will gradually ease to 2.0% by 2028. Yet, the SEP underscores substantial dispersion in individual projections, highlighting significant uncertainty about the precise path and timing of future cuts.

A critical constraint complicates near-term decision-making: official economic data for November (CPI) and December (unemployment) remains incomplete due to a government shutdown, creating a significant data blackout period. Decision-makers are forced to rely on softer indicators like business surveys and revised jobs reports, which signal ongoing economic fragility but lack the clarity of official releases. Historical patterns suggest this uncertainty will likely fuel heightened market volatility during the meeting window, with equity sectors sensitive to rate changes and currency pairs potentially reacting sharply to any hints of policy divergence.

Given the combination of strong market pricing for an immediate December cut, significant internal Fed divisions, persistent inflationary pressures, and the critical data gap, the Risk Defense stance dictates caution. The high probability of a rate move increases volatility, warranting a wait-and-see approach through the December meeting. Furthermore, the lack of definitive guidance and the potential for policy missteps amid uncertainty make reduce position on rate-sensitive assets prudent at this juncture. A no action stance remains appropriate until the December SEP is released and provides clearer consensus on the 2026 trajectory, confirming inflation stabilization and easing labor market pressures.