Three weeks ago, everything looked so clear. The Fed Chair stepped up to the podium, delivered a decidedly hawkish tone, and effectively slammed the door on any realistic hope for a December rate cut. The S&P 500 peaked that very same day – October 29th – and began rolling over. Markets hate uncertainty, but they hate being wrong even more. And right then, the market felt very, very wrong about an imminent easing.
Fast forward to late November, and the narrative has flipped in ways few would have predicted. The probability of a December cut has exploded from a depressing 30% low to roughly 72% according to fed funds futures. That’s not pocket change – that’s a complete reversal in sentiment. So what on earth changed?
I’ve been trading and managing money through multiple Fed cycles, and I’ve learned one thing above all: never fall in love with your thesis when the Fed speakers start “walking the hawkish comments back.” That’s exactly what we’re witnessing right now.
The Quiet Dissent Inside the FOMC
When the Chair speaks, most of the time the rest of the committee falls in line – at least publicly. But every now and then you get a wave of governors and regional presidents who politely, but firmly, push back through speeches and interviews. This is how the Fed communicates shifts before the official statement hits the wire.
In the last ten days alone, a clear majority of voting members have opened the door to a December move. Perhaps the most important voice belongs to the New York Fed President – someone who carries outsized influence because of how the trading desk actually implements policy.
“I still see room for a further adjustment in the near term to the target range for the federal-funds rate to move the stance of policy closer to the range of neutral…”
New York Fed President, November 21
That’s not ambiguous. That’s code for “I’m ready to vote yes in December.” And he’s far from alone. By my count, at least seven of the twelve voting members have now signaled varying degrees of openness to easing next month. In Fed speak, seven votes is a comfortable majority.
Why the Sudden Change of Heart?
Look, central bankers don’t flip-flop because they enjoy looking inconsistent. They react to data. And the data over the past month has started singing a slightly different tune.
- Unemployment has ticked higher for three consecutive reports – still low historically, but the trend is unmistakable.
- The six-week government shutdown shaved an estimated 1.5% off Q4 GDP once you annualize the impact.
- Leading indicators have softened more than most headline figures suggest.
- Global growth concerns – particularly in Europe and parts of Asia – are beginning to weigh on the outlook.
None of these developments alone would force the Fed’s hand. But taken together? They create exactly the kind of “insurance cut” rationale the committee loves to cite when it wants to ease without admitting the economy is in trouble.
Remember: the Fed’s dual mandate is maximum employment and price stability. When both start flashing yellow lights at the same time, the bias shifts toward supporting growth.
The Liquidity Calendar Just Turned Extremely Bullish
Perhaps the most under-appreciated tailwind hits on December 1st – literally days before the FOMC meeting. That’s when the current quantitative tightening regime officially winds down.
For the past two years, the Fed has been shrinking its balance sheet by letting roughly $60 billion of securities roll off each month. That has acted as a constant liquidity drain on the financial system. Ending QT flips that drain into neutral, and when you combine it with seasonal Treasury cash balance drawdowns, we’re looking at a meaningful injection of reserves right at year-end.
I’ve seen this movie before. The last time the Fed paused QT in 2019, risk assets went absolutely parabolic into year-end. History rhymes.
What the Bond Market Is Really Telling Us
While everyone fixates on the fed funds futures, the Treasury market has been quietly pricing in easier policy for weeks. The 2-year yield – arguably the most sensitive to near-term Fed moves – has dropped over 40 basis points since late October.
That kind of move doesn’t happen because bond traders are feeling charitable. It happens because they’re positioning for cuts. And bond traders have been far more accurate than equity traders at calling Fed pivots over the past three years.
The Political Angle Nobody Wants to Say Out Loud
Let me be blunt: the Fed insists it’s apolitical, but timing matters. With a new administration coming in January that has openly called for lower rates, delivering a cut in December removes any appearance of playing favorites later. It’s the cleanest possible off-ramp.
Central bankers are human. They read headlines. They know the optics of holding rates steady in December and then cutting in March would look terrible. Sometimes the path of least resistance is the path they take.
What Happens to Stocks If We Actually Get the Cut?
Simple: Santa Claus rally on steroids.
Every single December rate cut since 1990 has been followed by positive returns for the S&P 500 in the final weeks of the year – average gain just over 4%. Combine that with the QT pause, year-end liquidity surge, and the typical seasonal tailwind, and you have the ingredients for a powerful melt-up.
But here’s the catch – and it’s a big one. The easy money trade of “three or four cuts in 2026” that everyone was pricing in October? That’s probably dead. The Fed will likely signal a much more gradual path next year. So we might get the December gift, but the 2026 outlook becomes far more data-dependent.
Positioning and Risk Management Going Into the Meeting
Markets are now leaning heavily toward a cut. That creates asymmetry. If they deliver, the upside is solid but probably already partially priced. If they hold rates steady again, the downside could be sharp – think 5-8% drop in a matter of days.
My personal approach: I’m carrying higher-than-normal equity exposure into the meeting, but with tight stops and defined risk. The liquidity tailwinds are simply too strong to ignore completely, but I remember 2018 all too well when the Fed shocked markets by staying hawkish into year-end.
The bottom line? Never fight the Fed when liquidity is expanding and a majority of voting members are openly leaning dovish. The odds strongly favor a December cut despite the tough talk three weeks ago. And if they do deliver, the path of least resistance for risk assets remains higher into year-end.
Of course, central banking is as much art as science. We’ll get the final answer in just a few weeks. Until then, stay nimble – because in this business, the only certainty is that certainty is always temporary.
