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Here’s a reality check for all the folks who once treated interest-rate cuts like bulletproof suits of armour for markets: the market’s quite clearly saying the next one might not be coming. According to the CME Group’s FedWatch Tool, the probability of the Federal Reserve cutting interest rates in December now stands at 44.4% down from much higher levels not long ago.
What changed
It wasn’t the magic of an economic phoenix rising from the ashes; rather, it was stubborn inflation, a resilient job market, and central-bank messaging that said “not so fast”. Fed officials have repeatedly insisted that a rate cut is by no means etched in stone.
Markets, reading these cues, are trimming their chances for an easing cycle in December.
Why the 44.4% number matters
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A rate cut, especially when expected, often loosens financial conditions: cheaper borrowing, more risk-taking, higher asset prices. But with odds under 50%, those upcoming tailwinds may fade.
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Risk assets stocks, crypto, high-growth bets often lean on the idea of “lower for longer” rates. That idea is now under strain.
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For investors who assumed that rate cuts didn’t matter so much anymore because we’d reached some mythical “new regime” this marks a reminder: yes, rates still can matter.
So … when did rate cuts stop “not mattering”?
There was a period when it seemed worldwide that cuts were baked into markets and their impact minimal. But expectational shifts matter. When the Fed signals that cuts are less likely, the old relief-trade script falters. CME Group’s markets used to price in cuts and then ignore them; now they’re pricing in no cut and that could change the playbook.
What could happen next
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If December passes with no cut, we could see a sell-off or at least a pause in risk-asset momentum as the “funding tailwind” doesn’t arrive.
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If inflation or labour-market data surprise to the upside, odds for higher rates (not cuts) might increase and that’s a heavier headwind.
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On the flip side: if inflation collapses or the economy weakens dramatically, the odds of a cut could rebound quickly and catch markets off-guard.
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Markets may shift from celebrating “rate cuts don’t matter” to bracing “rate hikes or holds do matter”.
FAQs
Q1: What exactly is the 44.4% figure?
It’s the probability derived from the CME Group’s FedWatch tool showing that markets assign a 44.4% chance the Fed will reduce rates in December.
Q2: What does it mean when the probability is under 50%?
It means the market thinks a rate cut is more likely not to happen than to happen. In other words: the default expectation shifts to no cut.
Q3: Why do markets care if the Fed cuts rates?
Rate cuts generally lower borrowing costs, support risk-assets, and boost liquidity. If cuts are less likely, those benefits may not materialize.
Q4: Does this mean rate cuts “don’t matter” anymore?
Not exactly. The shift here is that cuts still matter in fact, the decision not to cut is now influential. Markets are reacting because holding rates matters.
Q5: What could hurt markets now?
If the Fed holds firm or signals even more restraint while inflation remains elevated, risk-assets may face headwinds especially sectors that rely on cheap credit or high growth expectations.
Q6: Should investors change their strategies because of this?
It depends on risk tolerance and timing. Investors may want to ensure they’re not overly exposed to a “rate cuts fix everything” thesis, and consider how market conditions shift when cuts are in doubt.