Rate Decision | Date: December 10, 2025
Probabilistic assessment of the next Federal Reserve policy decision using integrated US and global macro regimes.
Fed Policy Advisor: Rate Decision Outlook
Fed Reaction Function – Weighted Channel Assessment
Cycle-sensitive decomposition of the Fed’s reaction function across key inputs and inferred policy bias.
| Channel | Signal Direction | Momentum | Fed Sensitivity (Contextual Weight) | Policy Push |
|---|---|---|---|---|
| Inflation & Prices | Moderating | Weakening | Medium | CUT |
| Labour Market | Cooling | Accelerating downside | High | CUT |
| Growth & Demand | Slowing | Broad-based | Medium | CUT |
| Liquidity & Financial Conditions | Easing | Rebounding | Low | HOLD |
| Credit & Risk Transmission | Tightening | Persistent | High | CUT |
| Global & USD | Weak demand | Stable | Medium | CUT |
| Market Pricing & Positioning | Dovish | Firming | Medium | CUT |
| Fed Communication / Reaction-Function | Cautious easing tone | Reinforced | High | CUT |
Conclusion: Weights reflect a late-cycle, asymmetric Fed reaction function prioritizing downside labor and credit risks over lingering inflation. The net directional bias from the weighted assessment points toward: CUT.
Fed Policy Advisor – Rate Decision Outlook (Cut / Hold / Hike Probabilities)
Executive Summary
The macroeconomic environment indicates an ongoing moderation in economic activity, a clear softening in the labor market, and emerging vulnerabilities in credit conditions. While inflation remains somewhat elevated, the Federal Reserve's recent policy actions and communications suggest a prioritization of downside employment risks. The overall Fed tone has shifted to cautious easing, reinforced by two recent rate cuts and the conclusion of quantitative tightening.
Specific inputs signal:
- US economic activity has largely remained unchanged but is showing signs of softening in some Districts, with consumer spending declining, especially among lower- and middle-income households. Core manufacturing activity is resilient, but industrial production remains neutral. [Source: Federal_Reserve_Beige_Book_Summary.html]
- The labor market is cooling, characterized by easing tightness, elevated underemployment, bearish turnover signals, and softening payroll momentum. The Fed explicitly notes rising downside risks to employment. [Source: labour_market_momentum_methodology] [Source: Federal_Reserve_Beige_Book_Summary.html]
- Inflation is moderating overall, with policy-relevant PCE measures below their historical median and market-implied expectations stable but decelerating. However, producer-side pressures are building, and tariff effects are expected to contribute to a one-time price level shift. [Source: fed_inflation_signal] [Source: US_CPI_vs_PPI_Divergence_Inflation]
- Liquidity conditions are easing, driven by the unwinding of the ON RRP facility and bullish M2 growth. Real interest rates are neutral, and SOFR positioning is balanced, indicating a supportive monetary backdrop. [Source: Federal_Reserve_Liquidity_Composite.html] [Source: Real_Interest_Rate_Trend_Signal.html]
- Credit conditions are generally stable with tight spreads, but the Beige Book highlights rising consumer loan delinquencies and small business credit struggles, indicating emerging fragility. [Source: Financial_Stress] [Source: Federal_Reserve_Beige_Book_Summary.html]
- Global growth is mixed, with strong industrial metals demand but defensive precious metals positioning and deteriorating flow momentum in the Rates sector. The USD is in a weakening trend but with contradictory positioning risk. [Source: Economic_Cycle_Proxies_Flow_Momentum.html] [Source: usd_index_signal.html]
Fed communications from the September and October FOMC minutes and Chair Powell's press conferences clearly articulate a shift in the balance of risks towards employment downside, prompting two consecutive 25 basis point rate cuts and the decision to conclude quantitative tightening. While Powell noted "strongly differing views" regarding a December cut, the proactive, forward-looking stance and risk asymmetry (prioritizing employment stability) strongly suggest further easing is probable given the deteriorating macro data.
Probabilistic Assessment of the NEXT FOMC Policy Decision (December 10, 2025)
The Fed's reaction function, particularly its heightened sensitivity to employment and credit risks in a late-cycle environment, alongside its recent dovish pivot, leads to the following probabilities for the upcoming decision:
- CUT: 60%
- HOLD: 40%
- HIKE: 0%
Rationale: The cumulative evidence from the macro themes indicates a consistent pattern of softening labor market conditions, declining consumer demand (especially for lower/middle-income households), and emerging stress in consumer and small business credit. These factors align with the Fed's stated concern about downside risks to employment and financial fragility, which it has demonstrated a willingness to address proactively through rate cuts. While inflation remains somewhat elevated, the Fed has articulated a view that some of this is temporary (tariffs) or part of an ongoing disinflationary trend in services, suggesting increased tolerance for above-target inflation in the near term when employment risks are rising. The easing liquidity backdrop from the ON RRP unwind and conclusion of QT provide a supportive, albeit less direct, easing impulse.
However, Chair Powell's explicit comments in the October press conference about "strongly differing views" within the Committee regarding a December cut, and that a cut is "not a foregone conclusion," introduce a material probability for a "HOLD" decision. This suggests a faction within the FOMC may prefer to pause and assess the cumulative impact of the previous two cuts (September and October) and the cessation of quantitative tightening (effective December 1), particularly given the lingering inflation and data availability issues due to the government shutdown mentioned by Powell. Despite this internal debate, the prevailing dovish tilt and the Fed's emphasis on risk asymmetry (acting to prevent a sharper employment deterioration) maintain a higher probability for another accommodative move.
Self-healing
- **High-Value Inputs to Add**
- NBER Recession Indicator (USREC) data: Crucial for explicit macro cycle phase determination and weighting model calibration.
- Full historical and current PCE and CPI-PPI data: Essential for robust trend analysis of primary inflation metrics.
- Real-time Fed balance sheet updates (daily/weekly): Provides faster insights into liquidity dynamics beyond monthly aggregates.
- **Weaknesses in Provided Inputs**
- Several data tables (Job Flows, Capex Intent, Metals Tailwind, STLFSI4, BUSLOANS/TOTALSL, M2, SOFR CoT) are either stale, incomplete, inconsistent in frequency, or contain future-dated projections, limiting the accuracy and timeliness of the analysis; ensure comprehensive and current data for all signals.
- Static diffusion index and potentially ambiguous underemployment score in labor market reports reduce dynamic insight; clarify or provide dynamic metrics and detailed methodology.
- "Price" column in CoT signal tables lacks explicit definition (e.g., daily/weekly close, futures/spot, currency pair), hindering direct price-signal correlation.
- **Prompt Gaps or Issues**
- The prompt requested analysis of "Macro Theme: US Growth & Business Cycle signals (for macro-cycle linkage where provided)," but no explicit, general macro cycle indicator (e.g., NBER Business Cycle Dating Committee data) was supplied to facilitate this linkage beyond individual growth components.