Will the Fed Cut Rates Again in December 2025?

TL;DR

A December rate cut remains possible, but Federal Reserve officials are divided and Chair Jay Powell said another reduction is far from certain. Markets lowered their implied confidence after his remarks, while the Fed’s decision to end quantitative tightening addressed emerging liquidity constraints. Meta separately sold $30 billion of bonds after attracting a record $125 billion of orders.

Transcript

SCARLET: FROM NEW YORK CITY A "BLOOMBERG REAL YIELD" STARTS RIGHT NOW. COMING UP, CREDIT CONCERNS EASE ON WALL STREET WITH GOLDMAN SACHS DAVE SOLOMON SAYING HE DOESN’T SEE LOOMING RISKS. TRADERS LOOKING AT A DECEMBER REDUCTION AND JAY POWELL WARNS IT’S NOT A FOREGONE CONCLUSION AFTER TWO STRAIGHT CUTS THIS FALL. THIS IS IN PART BECAUSE OF A DIVIDED... Read More

Key Insights

• A December rate cut is not guaranteed because Federal Reserve officials held strongly differing views about the next step, and Jay Powell explicitly said another reduction was far from a foregone conclusion after two straight cuts during the fall.
• The two-year Treasury yield is highly sensitive to expected Federal Reserve policy, and it climbed to its highest level in almost four weeks after Powell challenged the market’s confidence that officials would deliver another rate cut before year-end.
• The market’s implied probability of a December cut fell from near certainty to roughly 60% to 65%, according to Bryan Whalen, who characterized Powell’s comments as a way to preserve policy flexibility during the six weeks before the next meeting.
• The Federal Reserve faces two-sided risks because inflation remains somewhat elevated while labor-market conditions appear to be gradually cooling. Participants said tariff-affected prices complicated inflation readings, while workforce reductions and softer employment evidence pointed toward weaker labor demand.
• Federal Reserve dissents are a healthy feature of the current debate because the economic risks are unclear and credible arguments exist on both sides. A weakening labor market supports preemptive easing, but strong growth and relatively easy financial conditions argue against aggressive cuts.
• Ending quantitative tightening is intended to address liquidity constraints rather than directly determine Treasury yields. The discussion noted that liquidity had tightened over the previous 30 days and argued that acting early could reduce the risk of volatility associated with draining excessive reserves.
• Meta’s $30 billion bond offering attracted a record $125 billion of orders, making it the largest investment-grade bond sale of the year and tied for the fifth largest ever, even as equity investors questioned the company’s pace of spending.
• Corporate bond supply diverged sharply by credit quality in October. Overall sales reached a record $132 billion after Meta’s transaction, while high-yield issuance totaled $18 billion, the lightest monthly supply since April after September’s much stronger activity.

Questions & Answers

Q: Will the Federal Reserve cut interest rates in December 2025?

A December reduction remained possible, but it was not certain. Jay Powell said committee members had strongly differing views and described another cut as far from a foregone conclusion. One roundtable participant estimated that market confidence had fallen from near certainty to roughly 60% to 65%, while still arguing that softer labor data could ultimately support a cut.

Q: Why did the two-year Treasury yield rise after the Fed meeting?

The two-year Treasury yield rose because it is especially sensitive to expectations for Federal Reserve policy, and Jay Powell pushed back against assumptions of an automatic December cut. Following his remarks, the yield returned to its highest level in almost four weeks as traders reduced their confidence that another quarter-point reduction would arrive before year-end.

Q: Why is the Federal Reserve divided over further rate cuts?

Federal Reserve officials are balancing two-sided risks. Labor-market conditions appear to be gradually cooling, which supports preemptive easing, while inflation remains somewhat elevated and was described in the discussion as still near 3%. Economic growth and financial conditions also appeared relatively strong, giving some officials reasons to oppose aggressive cuts and favor a meeting-by-meeting approach.

Q: What economic evidence could support another December rate cut?

Further evidence of flat or declining labor demand could support another cut. The discussion cited softer employment data, anecdotal workforce reductions mentioned by Amazon, Walmart, and UPS, and a larger reduction in labor demand than labor supply. Private information from ADP and any resumed official data after the government shutdown were identified as potentially important before the December meeting.

Q: Why did the Federal Reserve end quantitative tightening?

The Federal Reserve ended quantitative tightening to respond to liquidity constraints that had become visible in short-term markets. Participants said liquidity had dried up over the previous 30 days and argued that the Fed was acting earlier than it had in 2019. The change was presented as a way to manage reserves and reduce the possibility of unnecessary market volatility.

Q: How could ending quantitative tightening affect the yield curve?

The roundtable argued that ending quantitative tightening should not materially move the two-year Treasury yield because reserve management and short-term liquidity changes may involve only a few basis points. However, excessive liquidity drainage could create volatility, credit-contagion concerns, and pressure on longer maturities. Treasury issuance decisions, including possible additional bill supply, could also respond to the change.

Q: How large was Meta’s bond sale and investor demand?

Meta sold $30 billion of bonds and received a record $125 billion of orders. The program described it as the largest investment-grade bond sale of the year and tied for the fifth largest ever. The transaction helped push overall October bond sales to a record $132 billion, even as equity investors expressed concern about Meta’s pace of spending.

Q: Do isolated private-credit problems signal a systemic crisis?

The market participants quoted in the program did not view a handful of troubled credits as evidence of an imminent systemic issue. They acknowledged that lenders make mistakes, fraud can occur, and investors can suffer lower or negative returns when the credit cycle weakens. However, they described the current credit environment as robust, with tight spreads, while recognizing that a future economic slowdown would produce losses.

Summary & Key Takeaways

• The Federal Reserve delivered a quarter-point rate cut, its second straight reduction that fall, but Jay Powell cautioned that another move in December was not assured. His remarks exposed strongly differing committee views and caused the policy-sensitive two-year Treasury yield to rise to its highest level in almost four weeks.

• Roundtable participants generally viewed Powell’s warning as a recalibration of excessive market certainty rather than an end to the cutting cycle. They argued that softer labor conditions could support another cut, while resilient growth, inflation near 3%, and relatively easy financial conditions gave officials reasons to proceed carefully and meeting by meeting.

• The Fed also announced the end of quantitative tightening as signs of constrained market liquidity emerged. In corporate credit, Meta sold $30 billion of bonds and attracted a record $125 billion of orders, helping October investment-grade issuance reach a record $132 billion, while high-yield supply slowed to $18 billion for the month.