FOMC December 2025 Meeting Outlook: Rate Cut Expectations and Market Dynamics

This analysis is based on the Seeking Alpha report [1] published on December 7, 2025, which outlines the market outlook ahead of the December 9–10, 2025 FOMC meeting. Risk assets have been largely buoyed by the prospect of a Federal Reserve rate cut, while the US Dollar Index (DXY) remains slightly weaker within its recent trading range [1]. Major US indices recorded modest gains in the lead-up: the Dow Jones Industrial Average (^DJI) rose 1.08% on December 3, 2025, and rate-sensitive sectors like Real Estate (1.39%) and Communication Services (1.05%) led gains on December 5, 2025, as investors rotated away from defensive sectors such as Utilities (-2.05%) and Basic Materials (-1.17%) [0].

Market pricing via the CME FedWatch Tool shows an 87.2% chance of a 25bps rate cut in December, with major banks including Morgan Stanley, J.P. Morgan, and BofA Global Research revising their forecasts to align with this expectation [4]. Recent dovish comments from key Fed officials, including New York Fed President John Williams and Fed Governor Christopher Waller, have reinforced these sentiments [2]. However, the Fed’s October meeting minutes revealed a deeply split committee with “strongly differing views” on a December cut [2], introducing uncertainty. The upcoming meeting will include an update to the Summary of Economic Projections (SEP), which will provide important clues about the Fed’s policy path in 2026 [3]. Additionally, the end of the Fed’s quantitative tightening (QT) program on December 1, 2025, may add liquidity to markets, though its interaction with a potential rate cut remains uncertain [2].

1. Sector Rotation Aligned with Rate Expectations
   : The outperformance of interest-sensitive sectors (Real Estate, Communication Services) and underperformance of defensive sectors directly reflects market positioning ahead of the FOMC decision [0].
2. Institutional Consensus Bolsters Confidence
   : The revision of rate cut forecasts by major banks has reinforced market expectations, despite the FOMC’s internal divisions [4].
3. SEP as a Forward-Looking Driver
   : The updated SEP will be a critical determinant of 2026 market sentiment, outlining the Fed’s projections for future rates, inflation, and growth [3].
4. Liquidity and Rate Policy Interaction
   : The end of QT, coupled with a potential rate cut, creates a unique liquidity environment that could amplify market moves depending on FOMC guidance [2].

• Risks
  :
  • A hawkish surprise (no rate cut or cautious 2026 guidance) could cap equity upside and strengthen the US dollar, reversing recent trends [1].
  • The FOMC’s deep division may lead to conflicting signals, increasing market volatility [2].
  • Potential Fed leadership changes could alter 2026 rate projections, making current pricing subject to revision [1][3].
• Opportunities
  :
  • A 25bps rate cut with dovish SEP guidance could drive further gains for rate-sensitive sectors [0].
  • Ending QT may add liquidity to markets, supporting asset prices alongside a rate cut [2].

• The FOMC meeting on December 9–10, 2025, is the primary focus of global markets, with an 87.2% probability of a 25bps rate cut priced in [4].
• Equity indices have shown modest gains, with sector performance reflecting a shift toward rate-sensitive assets [0].
• The US dollar remains within its recent trading range, with technical support at 98.58 and resistance at 99.51 post-FOMC [1].
• Major banks now expect a December rate cut, but the FOMC committee is deeply split [2][4].
• The updated SEP will guide 2026 monetary policy, while the end of QT adds a liquidity variable [2][3].
• Market participants should monitor the FOMC decision and guidance closely, as hawkish surprises or conflicting signals could increase volatility.