Is a December Rate Cut Becoming Inevitable?

This week’s softer labour data may not have thrilled analysts, but it certainly hasn’t dimmed market optimism. In fact, Wall Street appears increasingly hopeful that a December “Christmas-season” rate cut from the Federal Reserve is within reach. Just a few weeks ago, futures markets placed the odds of a cut near 50%; today, expectations have surged to nearly 90%. The missing piece of confidence has been weakening labour indicators, and recent data may have provided exactly that.

The Fed now faces a challenging balance. Inflation remains stuck around 3%, still above the 2% target and proving stubborn. Yet the labour market is clearly cooling: job openings continue to decline, the unemployment rate sits near 4% amid a shrinking labour pool, and ADP’s November report surprised with a 32,000 job loss alongside slowing wage growth. Small businesses, in particular, showed the sharpest pullback. These developments have added a dovish tilt to market sentiment, driving equities higher as bond yields eased.

At the same time, investors are still navigating the fog created by the recent 43-day government shutdown, which delayed critical economic reports. With official payrolls and CPI data due later in December, markets have been forced to rely on secondary indicators that tell a mixed story, contributing to the day-to-day swings in major indexes. Still, most economists surveyed by Reuters expect a quarter-point cut next week, despite divisions within the Federal Open Market Committee and Chair Powell’s caution about inflation risks.

Looking ahead, 2026’s policy path is less clear. Many economists, including those at Goldman Sachs and Bank of America, expect the Fed to slow the pace of cuts next year as economic growth reaccelerates and inflation gradually cools. Rate-sensitive sectors, especially technology and growth-oriented companies, stand to benefit most if easing continues while inflation stays contained.

Ultimately, the next few weeks will be pivotal. If official data confirms the labour market’s cooling trend and inflation remains subdued, markets could respond positively to both a December rate cut and the prospect of a soft landing. While uncertainty remains, the broader outlook continues to lean towards being constructive, providing investors with reasons for cautious optimism as we approach year-end.