In recent weeks, a chorus of more hawkish voices has emerged within the Federal Reserve (Fed), signalling a clear reluctance to follow through with another rate reduction at the upcoming December 9-10 meeting. Regional bank presidents such as Jeffrey Schmid (Kansas City), Lorie Logan (Dallas) and Beth Hammack (Cleveland) have raised concerns that inflation remains sticky and the labour market too resilient to justify further easing. For instance, Logan recently noted that she would find it “hard to support another rate cut unless we were to get convincing evidence that inflation is really coming down faster than my expectations or that we were seeing more than the gradual cooling that we’ve been seeing in the labour market.” These remarks underscore a growing internal guard-rail against additional loosening of monetary policy.
Compounding the hawkish tilt, Schmid reiterated that deeper cuts would likely do little to remedy structural labour-market stresses—such as technological change and immigration shifts—and might instead jeopardise the Fed’s inflation target. Hammack, likewise, questioned whether additional easing was warranted, stating plainly: “It’s not obvious that monetary policy should be doing more right now.” These high-profile voices reflect a broader strategic debate: is the economy in need of further stimulus, or should the Fed pause to assess recent actions before jumping in again?
Meanwhile, Jerome Powell has signalled caution. After two rate cuts in September and October, he noted that a December move “is not to be seen as a foregone conclusion — far from it.” With inflation still above target and missing data complicating the picture, the chair has conveyed the message that the committee stands divided and that patience might be warranted. This hawkish backdrop sets the stage for the markets’ shift in expectations.
How Markets Are Adjusting Their Expectations
Reflecting the shifting tone at the Fed, financial markets have rapidly scaled back their predictions for a December rate cut. Short-term interest-rate futures—considered the most real-time indicator of market sentiment around Fed policy—now ascribe roughly a 60% probability of no cut in December. This is a marked change from just days earlier, when odds were closer to even or even in favour of a cut. The swing highlights how traders are recalibrating as hawkish Fed officials press their case. Data suggest that the probability of a cut had plunged from as high as 90% or more a month earlier to below 50% in some measures this week.
Several factors underpin this recalibration. First, the economic-data pipeline has been disrupted—owing in part to a government shutdown that delayed key inflation and employment releases—leaving the Fed with less clarity than usual and markets more cautious. Second, inflation remains elevated: private-sector indexes suggest that many components of the Consumer Price Index are rising faster than 3 %, well above the Fed’s 2 % target. This reinforces the hawkish message that rates aren’t yet ready to move lower.
Investors are taking note. Treasury yields have backed up, reflecting the reduced likelihood of imminent easing, while equities have become more volatile amid rising uncertainty about the policy trajectory. The markets are now pricing in a scenario in which the Fed pauses, assesses, and only moves again when stronger evidence of economic weakness or disinflation emerges.
Why the Fed Hawks Are Pressing Their Case
There are several key motivations driving the hawkish stance within the Fed:
Inflation persistence: Although inflation has declined from its peak, it remains stubborn. Price pressures in services, rents, wages and insurance are still proving resilient. With inflation running above target and the risk of re-acceleration if policy loosening is too aggressive, hawks argue that the “no-cut” default is the prudent course. Labour-market strength: Despite some signs of cooling, the job market remains relatively tight. Unemployment is near historic lows, wage growth remains elevated in many sectors, and labour‐force participation has not recovered fully. Hawks contend that cutting rates too soon could overheat the labour market or undermine the path to 2 % inflation stabilization. Limited margin for error: Many hawks emphasise that the Fed already cut rates twice this year, bringing the policy rate into the 3.75 %–4.00 % range. This constrains further room for manoeuvre—especially if growth surprises or inflation rebounds. Thus, the argument is that only with compelling evidence of downside risk should policy be eased again. Structural risks and credibility: Some Fed officials are worried that further cuts might damage the bank’s credibility in fighting inflation, particularly if inflation remains persistent or resurges. As one official put it: “Cuts could have longer-lasting effects on inflation as our commitment to our 2 % objective increasingly comes into question.” The hawks view the risk of being too loose as now higher than being too tight. Data uncertainty: With the government shutdown having delayed several major releases, many Fed hawks are cautious about acting on incomplete information. One noted that “we are flying a little blind,” suggesting that a data hiatus makes a cautious stance more appealing. Rather than act pre-emptively, some officials prefer to wait until the fog clears.
What Could Still Trigger a December Cut
Although hawks are in ascendancy and markets are shifting, a December cut is not ruled out. Several scenarios could prompt the Fed to ease despite the hawkish momentum:
Significant economic weakening: Should labour-market indicators or manufacturing data show sharp deterioration, or retail sales collapse ahead of the holidays, the Fed may decide to act pre-emptively to calm a downturn. A sudden spike in unemployment claims or a contraction in business investment would change the calculus.
Disinflationary surprise: If inflation data—once released—show a meaningful and durable drop below expectations (especially in services or wage inflation), that could open the door for a cut as the Fed would feel confident that inflation pressure is easing.
External shocks: Geopolitical tensions, global growth scare or financial market disruption could prompt a cut as a risk-mitigation tool. The Fed often acts to counter unexpected external risks.
Committee shift: Dovish voices such as Stephen Miran have argued forcefully for further cuts. If economic signals were to change, these voices could tip the balance at the Federal Open Market Committee (FOMC). Miran, for example, had called for a larger cut previously and continues to press for a lower-rate environment. A shift in views or a surprise vote may deliver decision reversals.
Market Implications and Broader Risks
The tug-of-war between hawks and doves at the Fed—and resulting market recalibration—carries several implications:
Fixed-income markets: With odds of a cut falling, Treasury yields have trended upward. Investors in rate futures and swap markets are repositioning for a pause or even potential rate hikes in 2026 rather than imminent easing. This has ripple effects across mortgages, corporate bonds, and equity valuations. Equities and risk assets: Stocks had rallied in anticipation of continued easing; now the narrative is shifting. A policy “pause” rather than “cut” may dampen growth expectations and investor sentiment. Key sectors—such as growth or highly leveraged companies—may face increased pressure if discount-rates rise. Credit conditions: If rates remain higher for longer and funding costs persist, small businesses and households may face tighter credit. That in turn could impact consumer spending and investment growth, feeding back into the economy. Policy credibility: The Fed must navigate carefully between supporting growth and guarding inflation. A mis-step—cutting too soon or not reacting to signs of weakness—could erode credibility. The hawks argue that now is not the time to gamble. Timing risks: The upcoming data releases are unusually critical because of their delay. If the yawning gap in economic updates leads to unexpected surprises, the Fed may be forced into reactive policy rather than planned adjustment. That raises risks of mis-calibrated policy.
Looking Ahead to the December Meeting
As the calendar advances toward December’s FOMC meeting, the committee will face a complex set of signals: missing data, partisan divisions, global uncertainties and domestic economic pressures. The hawkish voices currently hold the floor, and market participants appear to have adjusted accordingly. But the decision remains in flux.
If the Fed stays on hold, it will mark a pause in its sequence of cuts and may signal that the policy pivot is over until clearer signs of disinflation or economic weakness emerge. Conversely, a cut in December would demonstrate the dovish camp’s influence and perhaps reposition the Fed toward more aggressive easing in 2026.
Whatever the outcome, the interplay between hawkish Fed messaging, evolving market expectations and the real-time data releases makes December’s meeting one of the most scrutinised in recent years. Traders have backed off earlier certainty in favour of caution—reflecting the wider uncertainty and internal contest at the Fed itself.
(Source:www.theglobeandmail.com)
Compounding the hawkish tilt, Schmid reiterated that deeper cuts would likely do little to remedy structural labour-market stresses—such as technological change and immigration shifts—and might instead jeopardise the Fed’s inflation target. Hammack, likewise, questioned whether additional easing was warranted, stating plainly: “It’s not obvious that monetary policy should be doing more right now.” These high-profile voices reflect a broader strategic debate: is the economy in need of further stimulus, or should the Fed pause to assess recent actions before jumping in again?
Meanwhile, Jerome Powell has signalled caution. After two rate cuts in September and October, he noted that a December move “is not to be seen as a foregone conclusion — far from it.” With inflation still above target and missing data complicating the picture, the chair has conveyed the message that the committee stands divided and that patience might be warranted. This hawkish backdrop sets the stage for the markets’ shift in expectations.
How Markets Are Adjusting Their Expectations
Reflecting the shifting tone at the Fed, financial markets have rapidly scaled back their predictions for a December rate cut. Short-term interest-rate futures—considered the most real-time indicator of market sentiment around Fed policy—now ascribe roughly a 60% probability of no cut in December. This is a marked change from just days earlier, when odds were closer to even or even in favour of a cut. The swing highlights how traders are recalibrating as hawkish Fed officials press their case. Data suggest that the probability of a cut had plunged from as high as 90% or more a month earlier to below 50% in some measures this week.
Several factors underpin this recalibration. First, the economic-data pipeline has been disrupted—owing in part to a government shutdown that delayed key inflation and employment releases—leaving the Fed with less clarity than usual and markets more cautious. Second, inflation remains elevated: private-sector indexes suggest that many components of the Consumer Price Index are rising faster than 3 %, well above the Fed’s 2 % target. This reinforces the hawkish message that rates aren’t yet ready to move lower.
Investors are taking note. Treasury yields have backed up, reflecting the reduced likelihood of imminent easing, while equities have become more volatile amid rising uncertainty about the policy trajectory. The markets are now pricing in a scenario in which the Fed pauses, assesses, and only moves again when stronger evidence of economic weakness or disinflation emerges.
Why the Fed Hawks Are Pressing Their Case
There are several key motivations driving the hawkish stance within the Fed:
Inflation persistence: Although inflation has declined from its peak, it remains stubborn. Price pressures in services, rents, wages and insurance are still proving resilient. With inflation running above target and the risk of re-acceleration if policy loosening is too aggressive, hawks argue that the “no-cut” default is the prudent course. Labour-market strength: Despite some signs of cooling, the job market remains relatively tight. Unemployment is near historic lows, wage growth remains elevated in many sectors, and labour‐force participation has not recovered fully. Hawks contend that cutting rates too soon could overheat the labour market or undermine the path to 2 % inflation stabilization. Limited margin for error: Many hawks emphasise that the Fed already cut rates twice this year, bringing the policy rate into the 3.75 %–4.00 % range. This constrains further room for manoeuvre—especially if growth surprises or inflation rebounds. Thus, the argument is that only with compelling evidence of downside risk should policy be eased again. Structural risks and credibility: Some Fed officials are worried that further cuts might damage the bank’s credibility in fighting inflation, particularly if inflation remains persistent or resurges. As one official put it: “Cuts could have longer-lasting effects on inflation as our commitment to our 2 % objective increasingly comes into question.” The hawks view the risk of being too loose as now higher than being too tight. Data uncertainty: With the government shutdown having delayed several major releases, many Fed hawks are cautious about acting on incomplete information. One noted that “we are flying a little blind,” suggesting that a data hiatus makes a cautious stance more appealing. Rather than act pre-emptively, some officials prefer to wait until the fog clears.
What Could Still Trigger a December Cut
Although hawks are in ascendancy and markets are shifting, a December cut is not ruled out. Several scenarios could prompt the Fed to ease despite the hawkish momentum:
Significant economic weakening: Should labour-market indicators or manufacturing data show sharp deterioration, or retail sales collapse ahead of the holidays, the Fed may decide to act pre-emptively to calm a downturn. A sudden spike in unemployment claims or a contraction in business investment would change the calculus.
Disinflationary surprise: If inflation data—once released—show a meaningful and durable drop below expectations (especially in services or wage inflation), that could open the door for a cut as the Fed would feel confident that inflation pressure is easing.
External shocks: Geopolitical tensions, global growth scare or financial market disruption could prompt a cut as a risk-mitigation tool. The Fed often acts to counter unexpected external risks.
Committee shift: Dovish voices such as Stephen Miran have argued forcefully for further cuts. If economic signals were to change, these voices could tip the balance at the Federal Open Market Committee (FOMC). Miran, for example, had called for a larger cut previously and continues to press for a lower-rate environment. A shift in views or a surprise vote may deliver decision reversals.
Market Implications and Broader Risks
The tug-of-war between hawks and doves at the Fed—and resulting market recalibration—carries several implications:
Fixed-income markets: With odds of a cut falling, Treasury yields have trended upward. Investors in rate futures and swap markets are repositioning for a pause or even potential rate hikes in 2026 rather than imminent easing. This has ripple effects across mortgages, corporate bonds, and equity valuations. Equities and risk assets: Stocks had rallied in anticipation of continued easing; now the narrative is shifting. A policy “pause” rather than “cut” may dampen growth expectations and investor sentiment. Key sectors—such as growth or highly leveraged companies—may face increased pressure if discount-rates rise. Credit conditions: If rates remain higher for longer and funding costs persist, small businesses and households may face tighter credit. That in turn could impact consumer spending and investment growth, feeding back into the economy. Policy credibility: The Fed must navigate carefully between supporting growth and guarding inflation. A mis-step—cutting too soon or not reacting to signs of weakness—could erode credibility. The hawks argue that now is not the time to gamble. Timing risks: The upcoming data releases are unusually critical because of their delay. If the yawning gap in economic updates leads to unexpected surprises, the Fed may be forced into reactive policy rather than planned adjustment. That raises risks of mis-calibrated policy.
Looking Ahead to the December Meeting
As the calendar advances toward December’s FOMC meeting, the committee will face a complex set of signals: missing data, partisan divisions, global uncertainties and domestic economic pressures. The hawkish voices currently hold the floor, and market participants appear to have adjusted accordingly. But the decision remains in flux.
If the Fed stays on hold, it will mark a pause in its sequence of cuts and may signal that the policy pivot is over until clearer signs of disinflation or economic weakness emerge. Conversely, a cut in December would demonstrate the dovish camp’s influence and perhaps reposition the Fed toward more aggressive easing in 2026.
Whatever the outcome, the interplay between hawkish Fed messaging, evolving market expectations and the real-time data releases makes December’s meeting one of the most scrutinised in recent years. Traders have backed off earlier certainty in favour of caution—reflecting the wider uncertainty and internal contest at the Fed itself.
(Source:www.theglobeandmail.com)