Shift in market expectations for December
Forecasts for a December interest rate cut have changed sharply in recent weeks. Fresh labor market data showing solid hiring in September has lowered the probability of a move by the Federal Reserve at its 9-10 December meeting. Economists surveyed by FactSet now place the odds of a cut at 22 percent, a steep drop from 97 percent in mid-October. CME FedWatch, which tracks futures pricing, indicates a slightly higher 41 percent likelihood.
The shift signals that Wall Street analysts and traders largely expect the central bank to hold rates steady after two cuts earlier in the autumn. Those reductions came in response to signs of a cooling labor market, but the September employment report points to continued resilience.
The change in expectations also follows a six-week blackout in federal economic data caused by the government shutdown, which limited the ability of policymakers to evaluate inflation trends and employment conditions. Fed Chair Jerome Powell had already warned that a December cut was not assured, noting that the job market remained on “firm ground.”
Labor market strength complicates the case for easing
The September jobs report showed employers added 119,000 positions, more than double the consensus estimate. The unemployment rate rose slightly to 4.4 percent, a level economists say likely reflects more people rejoining the workforce. Average hourly earnings increased 0.2 percent on the month and 3 percent year over year.
These figures indicate a labor market that is softening but not deteriorating sharply. Preston Caldwell, chief U.S. economist at Morningstar, said the report was “not as bad as feared” and, combined with recent hawkish comments from Fed officials, makes it likely the central bank will “skip a cut in December.” He added that a resumption of cuts is still possible in January 2026 if negative labor market trends persist.
The federal funds rate currently sits between 3.75 percent and 4 percent. Any delay in further reductions would keep borrowing costs for mortgages and auto loans elevated, a factor weighing on consumer sentiment amid concerns about the rising cost of living.
Inflation pressures and policy uncertainty
Inflation has edged up, reaching an annual rate of 3 percent in September. Policymakers are watching closely to ensure price increases do not accelerate. Several officials have expressed concern that inflation remains persistent enough to justify caution.
The Fed’s dual mandate requires balancing inflation control with labor market stability. While slower hiring earlier in the year contributed to the previous two rate cuts, the latest data suggests enough economic momentum to justify a pause. The challenge is compounded by the lack of full October data, which will now be folded into the November report scheduled for release on 16 December, after the Fed meeting.
Ellen Zentner, chief economic strategist at Morgan Stanley Wealth Management, said the missing October data adds uncertainty. She noted that although recent indicators had supported the case for a December reduction, “the Fed’s cautious bent” may lead policymakers to wait until they have a more complete picture.
Looking ahead to early 2026
The broader economic backdrop remains mixed. Hiring has slowed compared with last year, but firms are still reluctant to cut staff in an environment marked by policy volatility and uneven demand. Inflation remains above target, and borrowing costs are exerting pressure on households.
Given these conflicting signals, economists expect the Fed to prioritize stability at its upcoming meeting. A pause in December would give policymakers more time to assess labor market shifts, inflation developments and the impact of earlier cuts. Many analysts continue to see room for easing in early 2026 if growth weakens and price pressures fade.
