Global Monday Buzz: To Cut or Not To Cut? – Markets react to possible Fed rate cuts in December

Policymakers of the Federal Open Market Committee (FOMC) of the United States are at a crossroad on the decision for there to be another round of rate cut in December of 2025 after the first Fed reduction in October of this year by 25-basis-points. While the previous cut left the benchmark deferral funds rate at a range of 3.75% to 4%, the expectations of the market is for there to be another 25-basis-point cut in December. This expectation was especially strong last week that global equity markets have been performing green throughout the week in expectations for the reduction.

While the Federal Reserves officials previously disagreed on a rate cut, New York Fed President John Williams, a close ally of Federal Reserve Chairman Jerome Powell, announced in the previous week that he is of the expectations that the central bank can lower its key interest rates due to the risk of the labour market posing a bigger economic threat than higher inflation. According to him, the monetary policy right now is modestly restrictive and that further adjustments in the near term can move the stance closer to the neutral range.

However, there is a general disagreement on whether a rate cut right now is suitable with the balancing act of wanting to support employment and the continuous need to bring inflation down to the 2% target rate. This is especially set against a backdrop where the U.S. government shutdown made employment data harder to come by. However, according to some economists, the downside risks to employment have increased as the labour market has cooled, while the upside risks to inflation have lessened.

How did the US and global markets react to this?

With NY Fed President William’s comments from the previous week, investors have assigned a 72% probability for another quarter percentage point reduction during the December 9-10 meeting of the Federal Open Market Committee and just a 28% chance of no rate cut. Polymarket and Kalshi show a 80% belief of a rate cut by investors.

Both US and Global markets opened on Monday and ended the day higher, with the expectations of December cut following the comment from NY Fed President William. With that same expectation strengthening throughout the last week, US Equities continued to move upward with a weekly gain of 3.18% for Dow Jones ending the week at 47,716.42, S&P 500 gaining 3.73% ending Friday trading at 6,849.09 and NASDAQ composite gaining 4.91% throughout the week by ending Friday at 23,635.69. On the other hand, the yield on the benchmark 10-year Treasury experienced a downward adjustment of around 4.4 bps during the last week with hope that Fed may lower its key interest rates.

Asian markets also had a reasonable week following gains on Wall Street. Softer-than-expected US economic data, gain on AI-markets and expectations of rate cut led Asian and Emerging stocks to rally throughout the week where MSCI Emerging Market Index had a weekly gain of nearly 250 bps. This was primarily driven by the sentiment that a potential Fed Rate cut could influence Asian Central Banks to also go for a potential policy adjustment after December.

What are the actual chances of a 25-bps Fed rate cut?

While Fed Chair Powell has not spoken publicly since the late October FOMC meeting or given any indication of what the decision on rates would be, other Fed voting members and governors have given diverse difference of opinions on whether a rate cut is necessary. For example, the Boston Fed President Susan Collins mentioned during the last week that she is hesitant to support more cuts with the threat of inflation still posing a bigger threat to the US economy while Governor Christopher Waller has advocated for further easing, citing labour market issues and tariff-driven inflation.

There is also a bigger debate on the inflation of the US on whether the current inflation is a demand-pull inflation or a function of supply shock. U.S.-based Apollo’s Chief economist, Torsten Slock says that current inflation is largely a demand-side story with strong economic activity being picked up towards the second half of the year which keeps the headline rate above the 2% target rate and that a rate cut would be required to bring the economy back into balance.

All of this is happening against a backdrop where earlier in the last week, President Donald Trump announced at the US-Saudi investment forum at the Kennedy Center in Washington, DC, that he would fire Treasury Secretary Scott Bessent if the Federal Reserves does not decrease interest rates. However, it is worth noting that the Fed makes its own independent decision on interest rates solely on economic data and acts separately.

Few investment banks have given their own forecast on the possibility of a rate cut. JP Morgan announced earlier last week that it now expects a US Federal Rate cut of about 25-basis-points in December, reversing its earlier call of no rate cut while Goldman Sachs is also projecting a similar rate cut in December. If the Fed decides to not cut rate, the Federal Reserve could re-consider loosening its policy once again during January of 2026, or possibly during the first half of the other 8 scheduled meetings of 2026, especially with a new Federal Reserve Chair expecting to take office next year.

What does this mean to the US economy?

On understanding the impact of the next Fed policy would be to understand the impact on two key aspects of the US economy; the impact on Inflation and on the labour market.

If a rate of 25-bps does come into reality in December, it would potentially drive up the inflation rate from the 3% YoY rate recorded in September. With there being very little chance of October inflation data being released because of the government shutdown, it makes it difficult to forecast how November and December inflation rates would look like. However, Christmas holiday and year-end could possibly push the inflation number higher as a result of higher demand and higher consumption during the end of the year. It could also continue to weaken the US dollar which might provide export competitiveness for US exports at least on the short to medium term. On the other hand, if Fed decides to keep rates at the same level, it could possibly continue to negatively affect sectors that depend heavily on consumer strength with household confidence continuing to slip.

At the same time, the labour market is weakening, partly because of tariff pressures and consumer spending also starting to slow down, showing the economy is losing steam faster than expected. If the Fed responds with rate cuts, the impact would be felt widely. Sectors like housing and construction would get a boost from cheaper borrowing, while companies with large debt burdens would benefit from lower interest costs. This could reopen paused hiring plans or reduce layoffs due to financial pressure. The Fed would weigh both the positives and negatives of a rate cut and make the decision to downside risks to the US economy.

What does this mean for Sri Lanka?

Given the continuous twin surplus of the Sri Lankan economy both in terms of the Current Account as well as the Primary Balance, the country continues to be attractive for foreign investors especially in the context of global uncertainties that seem to have less impact on the country’s economy than earlier forecasted. This could continue to drive more positive sentiments towards both portfolio investments and direct investments especially going into 2026. If the US decides to go for a rate cut, global investors could potentially find better payoffs in an emerging economy like Sri Lanka with the positive macroeconomic fundamentals seen throughout the past 2 years since the crisis.