US Federal Reserve – Interest Rate Policy - December meeting

Heading into the Fed December policy meeting markets are grappling with a combination of uncertainty around incoming data and intra policy / committee divisions. The minutes from the October meeting revealed “strongly differing views” as to whether a further rate cut is appropriate in December: while some officials saw a December reduction as likely, “many participants” had already ruled out a cut at that meeting.

Earlier in October the Fed lowered its target range for the federal funds rate by 0.25% to 3.75% - 4.00%. Meanwhile, the Fed itself says a further reduction in December is “not a foregone conclusion”.

Key strategic implications:

1. Data dependency remains high. With recent disruptions (e.g., delayed economic data) and internal caution, the Fed emphasises that future policy will depend on incoming labour market indicators, inflation readings and financial conditions.
• If inflation remains sticky or employment remains resilient, the hawks could prevail, and the Fed may stay put rather than cut.
• If job growth slows significantly or inflation momentum weakens, the doves could argue for a December cut.
2. Cut probability is declining. Market expectations for a December cut have fallen — the uncertainty is high because the committee is divided.
• From a strategy perspective: positioning that assumes a near-certain cut in December is risky. A “no cut” outcome is plausible and may be underappreciated.
3. Impact on asset markets and yield curves:
• A no cut outcome (or a hint that cuts will be delayed) could push longer-term yields higher (hawkish surprise), favouring shorter-duration assets and possibly weighing on risk assets.
• Conversely, if the Fed signals more easing ahead, this could boost equities and credit spreads, but inflation/credit risk remains a caveat.
4. Tactical strategy:
• Maintain exposure to sectors benefitting from a stable-to-slightly-higher-rates regime (e.g., financials).
• Consider hedges for a hawkish surprise: e.g., reduce duration, tilt to quality.
• If forward guidance shifts to emphasize cuts in 2026, then cyclicals and growth reopen become interesting — but only after clearer signals.

Succession risk: Fed Chair replacement and policy regime change

Beyond the December meeting, attention is increasingly turning to the next Chair of the Fed. Jerome Powell’s term ends May 2026.

The White House has already signalled a process is underway and a shortlist of five potential successors has been named: Christopher Waller, Michelle Bowman, Kevin Warsh, Kevin Hassett and Rick Rieder.

Strategic relevance of this succession:

• A change in Chair often brings a shift in policy lean or communication style. Markets will be watching for signs of whether the next Chair will prioritise inflation control (hawk) or growth/employment (dove).
• If a candidate perceived as more dovish gains the nod, that could lower rates faster and favour growth assets. Conversely, a hawkish pick could reinforce a “higher for longer” scenario.
• The timing of an announcement may itself move markets: if the White House signals its choice ahead of schedule, one might see re-pricing of term-structure and risk premia.

 Summary

In short: for the December meeting, the probability of a rate cut is lower than consensus; the committee remains divided. The next Chair nomination (Powell’s successor) poses a meaningful medium-term structural risk to policy direction. Strategy should reflect both the tactical near term (December meeting) and the structural regime risk (succession).

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