Will the Fed cut rates in December?

Market Sentiment and Price Action

• Current market volatility is characterized as consolidation and "wobbling" rather than a structural breakdown, with assets pricing in credit for recent growth and Fed easing expectations.
• Confidence in both the AI growth narrative and Fed rate cut timing has been tested by near-term uncertainties, leading to a re-rating of high-flyers.
• The narrative has shifted from a "foregone conclusion" of September/October cuts to a much closer call, creating a more binary outlook.

Federal Reserve Outlook (December FOMC)

• Probability: Both analysts view a December rate cut as a "close call" or "house call," but uncertainty regarding available data makes the decision less definitive than anticipated.
• Data Constraints: The Fed faces a "data fog" due to the government shutdown, specifically the missing November employment data and the October report's lack of unemployment rate figures.
• Policy Debate:
  • Some committee members may be hesitant to cut without confirmed labor market deterioration.
  • Others argue for forward-looking insurance cuts to address rising unemployment risks, despite inflation lingering above 2%.
• SEP Projections: The December Summary of Economic Projections (SEP) is expected to show minimal change from September regarding the growth/inflation path, though the distribution of dots may show slightly wider uncertainty.

Corporate Financing and AI Capital Allocation

• Shift in Financing: Hyperscalers have shifted from financing growth purely via cash to a "debt boom," though balance sheets remain strong overall.
• Risk Assessment:
  • While aggregate debt levels are not currently a systemic concern, the increase in leverage signals a potential inflection point similar to the 1998-2000 period.
  • Investors should monitor rising equity volatility and credit spreads as barometers for these developing imbalances.
• Labor Market Signals:
  • Recent layoff announcements indicate a shift from "no higher, no fire" to "no higher, some fire," suggesting a corporate bet on AI efficiency without demonstrated utility.
  • Josh Schifrin anticipates the unemployment rate could tick up over the next 3-6 months, though this is viewed as a sign of churn rather than an impending recession.
  • Dominic Wilson notes that while the magnitude of cuts is not alarming, the number of companies reducing headcount is notable.

Geopolitical and Macroeconomic Trends

• China AI Race: China faces incentives to economize on semiconductor access, likely driving innovation in efficiency and power usage; commercialization of AI appears further ahead in China's retail-facing sectors.
• US-China Trade: China has successfully rediverted exports, maintaining a record trade surplus and current account surplus comparable to the 2000s boom despite US tariffs.
• Global Equities: European equities have performed surprisingly well despite a lack of significant earnings growth, riding a broad global bull market.
• Currency Reversal: The market consensus shifted rapidly from bullish to bearish on the US dollar in early 2025, reversing the strong dollar narrative seen a year ago.

Forward-Looking Catalysts and Timelines

• Key Data Release: The December payrolls report is identified as the critical pivot point; if the labor market does not show deterioration by early January, the recession risk threshold is likely cleared.
• Inflation Outlook: The analysts foresee a trajectory of lower inflation and interest rates driven by AI-driven efficiency, a weak housing market, and declining energy prices, despite current inflation stickiness.
• Political Activity: The Trump administration (2025) has exhibited significantly higher output and enthusiasm compared to the first year of the 2017 term, creating a dynamic and unpredictable policy environment.

Non-Market Surprises (2025)

• "69" (Six Nine) was selected as the word of the year by Dictionary.com, surprising analysts regarding its widespread adoption as an inside joke.
• Josh Schifrin noted personal success in baking hyper-realistic cakes following a Netflix series obsession.
• Dominic Wilson highlighted the unexpected intensity of regulatory and legislative output from the current administration.