Fed Rate Cut Odds for December Surge Above 70%, Igniting Market Rally
Dovish commentary from a key Fed official reversed market sentiment, sending stocks higher and bond yields lower as investors priced in a year-end policy pivot.
Investor expectations for a December interest rate cut from the Federal Reserve surged past 70% on Friday, triggering a broad-based rally in US markets and reversing a pessimistic start to the week.
The dramatic sentiment shift came after New York Federal Reserve President John Williams signaled potential openness to a near-term policy adjustment. The comments provided the dovish catalyst markets were seeking, abruptly ending a period of uncertainty driven by robust economic data.
Odds for a quarter-point rate cut at the Fed's December meeting jumped to over 75% on Friday, according to data from the CME FedWatch Tool. This represented a stunning reversal from Thursday, when probabilities languished below 40% amid concerns that a strong labor market and persistent inflation would force the central bank to maintain its restrictive stance.
"The market has been looking for a clear sign from the Fed, and Williams' comments were interpreted as exactly that," said a senior market strategist. "It was a green light for investors to start pricing in a more accommodative policy environment."
Wall Street responded swiftly. After a sharp sell-off on Thursday that saw the S&P 500 fall 1.6% and the Nasdaq Composite drop 2.2%, all major indices roared back to life. The Dow Jones Industrial Average gained over 600 points, or 1.4%, while the S&P 500 and Nasdaq Composite climbed 1.1% and 1.0%, respectively, recouping the previous day's losses.
The rally extended beyond equities, signaling a renewed appetite for risk across asset classes. The bond market saw significant movement as traders adjusted their positions. The yield on the benchmark 10-year Treasury note, which moves inversely to its price, fell to 4.06% from 4.15% a day earlier. The policy-sensitive 2-year Treasury yield also dipped, reflecting the growing conviction of an impending rate cut.
This renewed optimism was also evident in more speculative corners of the market. Cryptocurrencies, which had been under pressure, caught a bid, with Bitcoin recovering to trade above $84,000. Meanwhile, the CBOE Volatility Index (VIX), often called Wall Street's "fear gauge," slid by 11%, indicating a decrease in market anxiety.
The market's sharp reaction underscores its sensitivity to Fed guidance. For weeks, investors have been weighing conflicting signals: resilient economic growth on one hand, and the central bank's stated goal of taming inflation on the other. Williams' remarks, suggesting there may be "room for a further adjustment," tipped the scales decisively in favor of a dovish pivot.
Looking ahead, investors will be closely scrutinizing upcoming inflation and employment data for confirmation of this trend. While the market is now firmly betting on a December cut, any signs of unexpected economic strength could easily reverse the recent rally, as noted by analysts at Investopedia. For now, however, the prospect of lower borrowing costs has provided a powerful tailwind for markets heading into the final month of the year.