Financial markets are buzzing with anticipation as major investment banks increasingly predict the Federal Reserve will deliver its third rate cut of 2025 next week. Bank of America has joined the growing chorus of institutions expecting a quarter-point reduction, bringing the consensus closer to reality. Market pricing currently reflects an 87% probability of easing, signaling widespread confidence in monetary policy loosening.
Top banks are in agreement on the December rate cut
Bank of America Global Research becomes the latest heavyweight player to join the likes of institutions such as Goldman Sachs, JP Morgan, Citigroup, and Wells Fargo, which are predicting a 25 basis point decrease during the upcoming Federal Open Market Committee Meeting scheduled for December 9-10. These predictions are an indicator that the institutions are expecting an easing of monetary policies.
The CME FedWatch Tool indicates that the markets are currently pricing an 87.2% probability of a cut of one quarter percentage point, which would decrease the target federal funds range to 3.50-3.75%, the lowest levels since the start of 2023. This marks an important reversal from the Fed’s previously tight monetary policy. There has been a marked increase in Fed easing expectations.
Dovish FOMC comments support rate cuts
Recent comments from Fed officials have reinforced expectations for interest rate cuts, as several important Fed officials expressed openness to easing monetary policy. The shift towards dovish Fed policy tone has come as the labor market slows and inflationary pressures ease. This positioning sets the tone for Fed officials to possibly decrease interest rates after holding rates high for the majority of 2025.
Economic indicators show that it is necessary to ease monetary policy
Softening labor market data, especially the most recent indicators showing that the labor market is cooling, as evidenced by the slowdown in wage growth, has been important for the shift in Fed expectations. In fact, wage growth has eased considerably, and such growth no longer poses an inflationary threat due to labor costs. This trend gives Fed members enough confidence that inflation is heading persistently towards the Fed’s 2% target without the need for tight monetary policy.
The Fed had already carried out two quarter-point cuts in September and October, reducing interest rates from their 23-year high levels that were reached back in 2023. Savings account interest and CD interest rates are attractive compared to history, though. Many of them are paying interest rates around the middle 4%, but additional cuts are sure to trim that figure.
A minority of institutions maintains a hawkish stance despite the consensus
Although the majority of the leading financial institutions are expecting the Fed to follow through with the interest cut come December, there are some that are skeptical and do not think that it is the right time for an easing of monetary policy. Morgan Stanley and Standard Chartered are some of the financial institutions that do not think that an easing of monetary policy would be the right decision.
Nomura and Macquarie are forecasting no change for December as well, making them members of the minority that feels the present state of the economy isn’t sufficiently favorable for further easing. This reflects an obvious concern that easing the policy could prove harmful and spark inflation. These differing views raise the question of how the present state of the economy translates into the world of monetary policy.
The December Fed meeting has come up as one of the most closely followed policy decisions of 2025, and the implications for financial markets and the economy are significant. Whether the Fed decides to deliver the widely expected cut, and if it does, the timing and nature would depend on the release of the final data and assessments of inflation and labor markets.
