Reassessing the Fed's Policy Trajectory: Is a December Rate Cut Closer Than Markets Anticipate?

The Federal Reserve's December 2025 policy decision has become a focal point for investors, with market expectations hovering near a 50-50 split on a potential rate cut. According to the CME FedWatch Tool, traders assigned a 53.6% probability to a December rate cut as of November 18, 2025, up from 50.1% the prior day, reflecting growing uncertainty about the economic outlook. Yet, beneath this statistical parity lies a more nuanced story of central bank responsiveness, market signaling, and historical precedents that suggest the Fed may act more decisively than current expectations imply.

Market Signals: A Tenuous Equilibrium

The near-coin-toss probability of a December rate cut underscores the Fed's delicate balancing act. While inflation remains stubbornly above the 2% target-year-ahead inflation expectations rose to 4.7% in November, with CPI and PCE inflation at 3% and 2.8%, respectively-the U.S. economy has shown signs of a pronounced slowdown according to recent market analysis. Q3 2025 GDP growth estimates range from 2.3% (New York Fed) to 4.1% (Atlanta Fed), with the OECD projecting a further moderation to 1.6% in 2025 as reported by market analysts. These divergent signals have left the Fed in a precarious position, where delaying action risks exacerbating labor market deterioration while premature easing could reignite inflationary pressures.

Central Bank Responsiveness: Waller's Advocacy and Labor Market Concerns

Federal Reserve Governor Christopher Waller has emerged as a vocal proponent of a December rate cut, emphasizing the need for monetary easing as a "risk management" measure. In a recent statement, Waller cited a weakening labor market, including below-expectation job creation ADP data showed only 6,500 net jobs added per month in September and October and declining job postings, as justification for action. He also highlighted employer surveys indicating that 2026 could be the most challenging job market for new college graduates since 2021, with automation and AI investments further suppressing hiring. These developments suggest the Fed is increasingly attuned to labor market fragility, even as it grapples with inflation.

Complicating the Fed's calculus is a government shutdown in November 2025, which has created a data void, limiting its ability to assess economic conditions in real time as market analysis indicates. This uncertainty mirrors historical episodes where the Fed had to act without complete information. For instance, during the 2008 financial crisis, the Fed slashed rates to near zero despite incomplete data, a move that ultimately stabilized markets and catalyzed a long-term recovery according to historical financial analysis. The 2025 context, however, is distinct: the Fed must navigate a dual mandate under stress, with inflation and employment risks pulling in opposite directions.

Historical Precedents: Lessons from Past Data Voids

The Fed's response to data voids offers instructive parallels. In 2020, during the pandemic-induced economic contraction, the Fed implemented rapid rate cuts and expanded asset purchases despite limited real-time data, prioritizing employment support over inflation concerns. Similarly, in late 2025, the central bank's two 25-basis-point cuts in September and October-lowering the federal funds rate to 3.75%-4.00%-reflect a proactive stance to preempt a deeper labor market contraction. These actions align with the Fed's historical tendency to prioritize employment during periods of economic fragility, even at the cost of short-term inflation overshoots.

Moreover, financial markets have already priced in a degree of Fed accommodation. Bond yields have softened, and equity indices have shown resilience, suggesting investors anticipate further easing. However, the Fed's responsiveness to market signals has historically been asymmetric: while it often acts swiftly to address downturns, it tends to delay tightening until inflation becomes entrenched according to historical data. This pattern raises the question: Is the December rate cut closer than the market anticipates?

The Case for a December Cut: A Risk-Managed Approach

The Fed's December decision will likely hinge on its interpretation of the labor market's trajectory. With unemployment rising to 4.3% and housing affordability and consumer spending showing signs of strain, the central bank faces mounting pressure to act. Governor Waller's advocacy underscores a growing faction within the FOMC that views a rate cut as a necessary buffer against a potential 2026 recession.

Historically, the Fed has demonstrated a willingness to adjust policy in response to evolving conditions, even when data is incomplete. The 2025 rate cuts, described by Chair Jerome Powell as "risk management cuts," reflect this approach. Given the current mix of slowing growth, a fragile labor market, and a data void, the Fed may lean toward a December cut to signal its commitment to supporting employment-a move that could exceed market expectations.

Conclusion: Navigating Uncertainty with Prudence

While the 53.6% implied probability of a December rate cut suggests a near-coin-toss scenario, the Fed's historical responsiveness to labor market risks and data voids indicates a higher likelihood of action than current market pricing implies. The central bank's dual mandate-balancing inflation and employment-remains under pressure, and its December decision will serve as a critical test of its ability to navigate this complex environment. For investors, the key takeaway is clear: the Fed's December policy trajectory may be more aggressive than the market currently anticipates, and positioning accordingly could offer a strategic advantage in the months ahead.