Market Briefing: Fed December Meeting & What to Expect

Dear MyCompass Friends:

   After signaling no December cut at the last meeting, Fed officials now appear set to lower rates by 25 basis points at the Dec. 9–10 meeting — the 3rd consecutive cut. The shift reflects rising concern over a weakening labor market, with unemployment climbing to 4.4% and consumer surveys showing confidence in job availability plunging.

Key Drivers
•     Labor Market Weakness: Jobless rate up from 4.0% to 4.4% this year; consumer sentiment on jobs deteriorating.
•     Inflation Bind: Inflation remains above target (3% in September vs. 2% goal), creating tension between easing and credibility.
•     Soft Landing Goal: Fed aims to balance recession risks with inflation control, lowering rates while avoiding overheating.
•     Policy Signals: Powell expected to stress that future cuts face a high bar, conditioning further easing on incoming data.
•     Dissent Risk: Up to three Fed officials may vote against a cut, citing inflation concerns.

Market Implications
•     Near-Term: A December cut is widely expected, but Powell’s press conference will set tone for 2026 projections.
•     Medium-Term: Markets may begin pricing a January cut more aggressively if labor data weakens further.
•     Long-Term: Financial markets currently expect two cuts in 2026, while the Fed projects one. Leadership uncertainty adds risk, with speculation about a new Fed chair under President Trump.

Challenges
•     Elevated inflation above target for four years threatens Fed credibility.
•     Rising unemployment risks recession if layoffs accelerate.
•     Affordability concerns dominate consumer sentiment, underscoring pressure on policymakers.
•     Bond markets could push long-term yields higher if Fed signals retreat from its 2% inflation target.

Bottom Line
The Fed is expected to cut rates in December, prioritizing labor market stability over inflation fears. However, Powell will likely emphasize caution, signaling that future cuts depend on data. Markets should brace for volatility as investors weigh recession risks, inflation persistence, and leadership uncertainty.

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