Fed Meeting: Non-Rate Decisions to Drive Market Reactions Amid Priced-In Rate Cut Expectations

The December 2025 Federal Reserve (Fed) meeting is occurring against a backdrop of U.S. stock markets near record highs, with the S&P 500 closing at 6,870.39, Dow Jones at 47,955.00, and NASDAQ at 23,578.13 on December 5 [0]. MarketWatch’s December 6 article [1] highlights that while the CME FedWatch tool indicates an ~90% probability of a 25-basis-point (bps) rate cut [2], this expectation is already fully priced into current valuations. As a result, the Fed’s non-rate decisions—most notably the Quarterly Summary of Economic Projections (SEP, including the “dot plot” of future rate expectations) and Chairman Jerome Powell’s post-meeting guidance—will be the primary drivers of market reactions.

Bond markets are also sensitive to the Fed’s guidance: Treasury yields have risen over 10 bps since November 28 amid mixed labor market signals [4]. A commitment to accommodative policy could lower yields, while a restrictive outlook could push them higher. Compounding the Fed’s decision-making is a 43-day U.S. government shutdown that delayed key labor market data [3], reducing the clarity of the economic backdrop.

1. Priced-In Expectations Shift Focus to Forward Guidance
   : The market’s near-certainty of a December rate cut (90% probability [2]) means the rate cut itself is unlikely to move markets. Instead, investors will scrutinize the SEP for signals on 2026 rate cuts; any deviation from current dovish expectations could trigger volatility.
2. Cross-Market Interdependencies
   : Bond yield movements (up 10 bps since late November [4]) and stock market highs are both linked to Fed policy expectations. A hawkish guidance shift could reverse gains in both asset classes, while a dovish outlook could reinforce bullish sentiment.
3. Policy Uncertainty from Dissent and Data Gaps
   : The FOMC may face the most dissents since 2019 [3], signaling internal division, while the delayed labor market data (due to the government shutdown [3]) adds ambiguity to the Fed’s economic assessment.
4. Medium-Term Policy Path Matters More
   : Short-term market reactions will hinge on immediate guidance, but medium-term trends depend on whether the Fed’s outlook aligns with market expectations of sustained accommodative policy.

• Risks
  :
  • Hawkish Guidance Risk
    : A SEP indicating fewer 2026 rate cuts than expected could trigger sharp sell-offs due to overpriced dovish expectations [2].
  • No-Cut Surprise
    : While unlikely (10-13% probability [2]), a decision to hold rates steady could cause significant volatility.
  • Dissent and Uncertainty
    : FOMC dissents and delayed economic data could create policy ambiguity, increasing market volatility [3].

• Opportunities
  :
  • A dovish SEP or Powell’s comments that reinforce expectations of future rate cuts could push stock indices to new record highs [3].
  • Clear guidance on the balance sheet or forward policy framework could reduce bond market uncertainty, stabilizing yields.

This analysis synthesizes data and insights on the upcoming Fed meeting:

• Market indices (S&P 500, Dow, NASDAQ) closed near record highs on December 5 [0].
• CME FedWatch shows an ~90% probability of a 25bps rate cut in December, which is fully priced in [2].
• Non-rate decisions (SEP, Powell’s guidance) will drive short-term market reactions.
• Key risks include hawkish guidance, unexpected rate holds, and policy ambiguity from dissent and data delays.
• Opportunities exist for record market highs if guidance aligns with dovish expectations.