As Fed hawks press their case, traders bet against December cut

The Federal Reserve's December rate decision is highly contested, with conflicting views among policymakers and volatile market expectations. Three hawkish Fed officials, including Kansas City's Jeffrey Schmid and Dallas's Lorie Logan, reiterated concerns about inflation and expressed reluctance for further rate cuts, while dovish Governor Stephen Miran advocated for another reduction. This divergence, coupled with the imminent release of delayed economic data post-government shutdown, has caused short-term interest-rate futures to shift significantly, now indicating a 60% probability against a December cut, underscoring the uncertainty surrounding the upcoming FOMC meeting.

Analysis

The Federal Reserve's December policy meeting faces significant uncertainty, with short-term interest-rate futures now indicating a 60% probability against a rate cut, a notable shift from previous weeks. This volatility reflects deeply divided views among central bankers and the imminent release of delayed economic data.

Three hawkish Fed officials—Kansas City's Jeffrey Schmid, Dallas's Lorie Logan, and Cleveland's Beth Hammack—reiterated concerns about inflation and expressed reluctance for further cuts, with Logan specifically requiring "convincing evidence" of faster inflation decline. Conversely, dovish Governor Stephen Miran advocated for another cut, aligning with his October dissent for a larger reduction.

The impending publication of economic data, delayed by the government shutdown, is poised to introduce further market volatility. Fed Chair Jerome Powell previously highlighted the "data fog" and the strong, differing views within the committee, emphasizing that a December cut is "far from" a foregone conclusion. This data will be crucial in shaping both market sentiment and the Fed's ultimate decision.

Key Decisions for Investors

• Investors should closely monitor the upcoming releases of delayed economic data for cues on inflation and labor market trends, as these will heavily influence Fed policy expectations
• Assess the implications of the continued divergence in Fed policymaker views, which suggests ongoing volatility in interest rate expectations and potential for market re-pricing
• Consider reviewing portfolio hedges or adjusting interest-rate sensitive exposures given the high uncertainty surrounding the December FOMC meeting's outcome