Markets Lose Confidence in a Year-End Cut
Wall Street’s expectations for a Federal Reserve rate cut in December are evaporating as inflation remains sticky, job growth slows, and internal divisions emerge within the central bank.
The CME FedWatch Tool now shows traders pricing in just a 22% probability of a rate cut by year-end, down sharply from nearly 60% one month ago. Investors say the combination of uneven labor data and resilient consumer spending has complicated the Fed’s message on when easing can safely begin.
“The market’s patience is wearing thin,” said Ellen Zentner, chief U.S. economist at Morgan Stanley. “Powell has to walk a fine line between acknowledging the economic slowdown and not declaring victory over inflation prematurely.”
The Data Problem: Slowing Jobs, Stubborn Prices
Recent employment figures highlight a paradox that has become central to the Fed’s challenge. Nonfarm payrolls grew by just 115,000 in September, the weakest reading since early 2021, while average hourly earnings rose a modest 0.2% month-over-month.
At the same time, core inflation remains above the Fed’s 2% target, driven by shelter and services costs that refuse to cool. The result is a mixed picture: the economy is slowing, but not slowing enough to justify a rate cut without risking renewed inflation.
“The Fed is stuck in a credibility trap,” said Michael Gapen, chief economist at Bank of America. “Cut too soon and you risk losing inflation control. Wait too long and you deepen the slowdown.”
Powell Faces a Divided Fed
Behind closed doors, Fed Chair Jerome Powell is said to be facing one of the most ideologically split Federal Open Market Committees in years. According to reports from insiders, regional presidents are increasingly at odds over whether policy should stay restrictive or begin to ease into 2025.
Some officials, including Minneapolis Fed President Neel Kashkari, argue that inflation progress justifies patience. Others, like Chicago’s Austan Goolsbee, warn that delaying cuts could hurt labor participation and consumer confidence.
“Powell’s job right now isn’t just steering policy, it’s keeping his own team aligned,” said Diane Swonk, chief economist at KPMG. “The communication challenge is becoming as difficult as the policy one.”
Labor Anxiety Builds Across Sectors
The slowdown in hiring has hit multiple industries, from logistics to manufacturing, and even parts of tech. According to ADP data, private payroll growth has cooled significantly, while small businesses are reporting declining job openings for the first time in two years.
Wage inflation has softened but remains elevated compared to pre-pandemic norms. “There’s a fear factor creeping in,” said Swonk. “Employers are slowing hiring, workers are hesitating to switch jobs, and households are beginning to pull back on spending.”
That tension between cautious consumers and policymakers worried about inflation could define the next several Fed meetings.
Bond Yields and Market Reaction
Treasury markets have already begun pricing out the prospect of a December cut. The 10-year yield climbed back toward 4.4%, while the 2-year yield, a key barometer of Fed expectations, rose above 4.7%, signaling renewed skepticism about short-term easing.
Equity markets responded with volatility. The S&P 500 shed 0.8% in afternoon trading, while the Nasdaq Composite dropped over 1%, as traders recalibrated for a longer period of higher rates.
“The market narrative has shifted from ‘when’ to ‘if’ regarding cuts this year,” said Zentner. “Investors are finally realizing the Fed may prefer to sit tight until mid-2025.”
The Political Pressure Mounts
With the 2024 election cycle heating up, Powell’s every word is under scrutiny. President Trump has repeatedly accused the Fed of being “too slow” to cut rates, while Democratic leaders have cautioned against moves that could reignite inflation.
“Powell’s independence is being tested,” said Mark Zandi, chief economist at Moody’s Analytics. “There’s no good political outcome here. Cut and risk inflation headlines, or wait and risk recession headlines.”
What Comes Next
The Fed’s next meeting in November will be pivotal. Analysts expect Powell to maintain a neutral tone, emphasizing data dependency and unity within the committee, two things that have grown increasingly fragile.
UBS economists predict the first cut won’t come until March 2025, while Goldman Sachs has pushed its expectations to May, citing “lingering uncertainty over labor resilience.”
“The December cut narrative is over,” said Gapen. “Powell’s challenge now is managing dissent without spooking markets.”
