Traders are rapidly piling into bets that the Federal Reserve will slash interest rates in December, a sharp reversal from just days ago when most expected the central bank to keep borrowing costs unchanged amid inflation concerns.
Why Have Expectations Flipped Again?
Just a week ago, markets were evenly split on whether the Fed would cut or hold rates at its December meeting.
By Wednesday last week, odds of no change surged to nearly 70%, with investors growing skeptical that the Fed had seen enough cooling in inflation and labor markets to justify easing.
But the narrative flipped last Friday and then again Monday.
New York Fed President John Williams and Fed Governor Stephen Miran hinted at a dovish stance late last week, followed by stronger signals from Governor Christopher Waller and San Francisco Fed President Mary Daly on Monday. Their comments suggested growing concern over the labor market and reinforced the likelihood of monetary easing.
"The labor market is soft. It's continuing to weaken," Waller said on Fox Business' “Mornings with Maria,” adding that inflation is expected to continue easing and that private sector data showed "nothing has really changed" since the last policy meeting.
Daly added more fuel, saying she was "not confident the Fed can get ahead" of growing labor market vulnerabilities, and openly backing a rate cut in December.
Fed Futures Price In Over 81% Rate-Cut Odds
Following these remarks, futures markets priced in a dramatic shift.
The CME Group's FedWatch tool now shows an 81% probability that the Fed will deliver a 25-basis-point rate cut at its December meeting.
The aggressive repricing has sparked a surge in both institutional and retail speculation.
On Kalshi, a CFTC-regulated prediction market platform, the "Fed decision in December?" contract is now the tenth most-traded event, with more than $13 million wagered—highlighting its broad appeal beyond Wall Street professionals.
El-Erian: ‘Whiplash’ Reflects Fed's Strategic Drift
Top economist Mohamed El-Erian described the recent volatility in rate-cut odds as "stunning," noting how traders went from pricing in a 90% probability of a cut, down to under 30%, and now back near 80%—all within a month.
"This kind of wild volatility is the opposite of the ‘predictability and stability' the Fed usually strives for," El-Erian said on X.
He attributed the policy confusion to several factors: shutdown-disrupted data, the Fed's dual-mandate squeeze (balancing inflation and employment), Chair Jerome Powell's waning authority, and the lack of a consistent strategic framework, which he believes has led the Fed to lean excessively on short-term data.
What's Happening On Wall Street?
The sharp reversal in rate-cut expectations has already lifted investor sentiment, triggering a rally in rate-sensitive assets and sending Wall Street sharply higher on Monday.
The Nasdaq 100 – as tracked by the Invesco QQQ Trust (NASDAQ:QQQ) – jumped 2.7%, marking its strongest session since May 12.
The combined market capitalization of the Magnificent Seven – NVIDIA Corp. (NASDAQ:NVDA), Microsoft Corp. (NYSE:MSFT), Apple Inc. (NASDAQ:AAPL), Alphabet Inc. (NASDAQ:GOOG) (NASDAQ:GOOGL), Amazon Inc. (NASDAQ:AMZN), Meta Platforms Inc. (NASDAQ:META) and Tesla, Inc. (NASDAQ:TSLA) – surged by over $600 billion to reach $21.3 trillion.
Read Next:
Image created using artificial intelligence via Midjourney.
© 2025 Benzinga.com. Benzinga does not provide investment advice. All rights reserved.
