Fed Interest Rate Prediction December 2025: Will the Fed Cut Again?

2025-11-04

Market expectations for the next Federal Reserve decision in December 2025 have shifted dramatically in recent weeks. Following a 25-basis-point rate cut at the end of October, traders had priced in another reduction for December.

However, Fed Chair Jerome Powell’s measured tone and divisions within the Federal Open Market Committee (FOMC) have added layers of uncertainty.

As economic data paints a mixed picture and parts of the U.S. government remain partially shut, markets are left guessing whether the Fed will deliver another rate cut before the year ends.

Market Odds Signal a Split View

As of early November, futures data tracked by the CME FedWatch tool show roughly a 60–70 percent chance of a rate cut in December. Before Powell’s latest remarks, the probability had climbed well above 80 percent.

His statement that “December is not a foregone conclusion” reset expectations and triggered a rise in Treasury yields and a rebound in the dollar.

This repricing reflects traders’ shifting perception of how close the Fed is to ending its easing cycle. Open interest in Fed futures suggests most investors still anticipate one more cut before the end of 2025, but the odds are narrowing.

Volatility in interest rate swaps and Fed funds futures now mirrors mid-2023 levels, suggesting traders are bracing for data-driven surprises between now and the December meeting.

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Fed Officials Remain Divided on the Path Ahead

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Recent speeches from FOMC members underscore how split the committee is. Powell said additional easing would depend on “clearer evidence” of cooling inflation and labor softness.

Vice Chair Philip Jefferson supported that stance, urging caution before moving again. However, Governor Adriana Kugler and Chicago Fed President Austan Goolsbee have both hinted that “incremental easing” could still be justified if growth moderates further.

The divided tone means the Fed is deliberately keeping all options open. This strategy aims to prevent overcommitting before critical data arrives.

For investors, every public statement and speech from policymakers between now and mid-December will carry market-moving weight, especially given the absence of complete federal data due to delayed government reporting.

Key Economic Indicators to Watch

The Fed’s next move hinges on three key indicators: employment, inflation, and financial stability.

Employment: Job creation has slowed modestly, but wage growth remains firm. A sustained rise in unemployment claims or a weaker payrolls print could strengthen the case for a December cut.

Inflation: The core Personal Consumption Expenditures (PCE) index — the Fed’s preferred inflation measure — remains near 2.6 percent, only slightly above target. Any surprise drop in CPI or PCE could push policymakers toward easing.

Financial conditions: Treasury yields, credit spreads, and liquidity signals in repo markets are also on the Fed’s radar. Liquidity stress or sharp tightening in credit availability would increase the pressure to ease policy further.

With the next major CPI and jobs reports due in mid-November, these data points will likely determine whether the Fed acts or holds steady.

Possible Scenarios for December 2025

Scenario 1: 25 bps rate cut (base case) — Still the most likely outcome if inflation cools and labor data weakens. It would mark the second consecutive reduction after the October cut.

Scenario 2: Hold rates steady — If inflation holds firm and growth remains stable, the Fed may choose to pause to evaluate the cumulative effect of prior cuts.

Scenario 3: Aggressive cut of 50 bps or more — Least likely unless a major downturn emerges or data shows a steep employment drop.

Markets currently lean toward Scenario 1 but are hedging with swaps and futures to prepare for Scenario 2. For equities and crypto markets, a confirmed December cut could trigger renewed risk appetite, while a pause would likely strengthen the dollar and weigh on speculative assets.

Factors That Could Change the Outlook

Beyond domestic data, several external risks could sway the Fed’s decision. The partial U.S. government shutdown is already delaying key data releases, leaving the FOMC with an incomplete picture of economic activity.

In addition, global energy price fluctuations, geopolitical tensions, and tightening liquidity in corporate credit markets could influence the Fed’s assessment of downside risks.

Meanwhile, investors are closely watching how prior cuts filter through the economy. With mortgage and auto loan rates still elevated, the Fed’s policy transmission is slower than usual.

That lag complicates the timing of any further adjustments, as policymakers weigh whether to act again or let existing easing take effect.

Conclusion

As December approaches, the Fed stands at a critical juncture. The market still expects another modest cut before year-end, but Powell’s cautious tone suggests the committee is not fully convinced.

Delayed data, uneven economic signals, and growing internal debate make this one of the most uncertain policy calls of 2025.

If inflation continues to ease and labor data softens, a 25-basis-point cut remains the most probable outcome.

However, any sign of resilience in consumer spending or job growth could prompt a pause. Until then, markets will remain on edge — watching every speech, report, and data point for a clue to the Fed’s next move.

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FAQ

What is the current market expectation for the December 2025 Fed meeting?

Futures data show around a 60–70 percent chance of a 25-basis-point rate cut, down from over 80 percent before Powell’s recent remarks.

Why did Powell say the December meeting is uncertain?

Powell emphasized that the Fed needs clearer signs of cooling inflation and softening labor data before taking another step. He said the committee is “not on a preset course.”

Which data reports will influence the decision?

The most important are nonfarm payrolls, unemployment claims, CPI, and core PCE inflation. These will help the Fed gauge whether the economy is slowing enough to justify another cut.