Just weeks ago, the idea of a December Federal Reserve rate cut looked uncertain. Inflation was proving sticky, labour data looked resilient, and Fed officials were cautious in their language. Markets had downgraded expectations and shifted their focus to early 2026 instead.
But in a rapid turn of events, the December rate cut is now back in play — and markets are reacting fast.
What Changed?
1. Fed officials are signalling openness again
A series of comments from influential Fed voices has reignited expectations. Officials who were previously non-committal are now acknowledging softer pockets in the labour market and growing downside risks to the economy. Their tone hasn’t been outright dovish, but it has clearly shifted toward flexibility.
In Fed-speak, that’s meaningful.
2. Data is cooling at the margins
Inflation hasn’t collapsed — but it has moderated enough for policymakers to consider adding support. Hiring is still healthy but slowing. Wage pressures are easing. Manufacturing remains fragile. Taken together, the data offers the Fed more breathing room.
3. Markets are leaning into the narrative
The moment expectations shifted, investors responded. Treasury yields dipped, equities caught a bid, and risk appetite returned. Futures now reflect a strong probability of a 25-bps cut in December.
When markets believe the Fed is ready to move, the narrative often becomes self-reinforcing.
Why the Fed Might Cut in December
A. To prevent a sharper slowdown
The Fed’s worst-case scenario isn’t slightly elevated inflation — it’s a sudden downturn. With global growth cooling and US consumer momentum slowing, a pre-emptive cut would act as insurance.
B. To support a labour market that is losing steam
Jobs data isn’t crashing, but it’s softening in a way that concerns policymakers. The Fed has repeatedly said it doesn’t want to “wait for something to break.”
C. To rebalance financial conditions
Yields surged earlier in the quarter, tightening conditions more than the Fed intended. A cut would neutralise some of that unwanted tightening and stabilise markets heading into 2026.
What a December Cut Means for Markets
1. Risk assets could see a year-end boost
Lower rates reduce discount rates, support valuations, and lift appetite for equities, REITs, and growth sectors.
2. The US dollar may weaken
A softer dollar typically benefits commodities, exporters, and emerging markets — especially in Asia.
3. Bond yields could reset lower
A downward shift in yields would improve bond performance and create opportunities for income-seeking portfolios.
Implications for Asia
Asia stands to benefit first
A weaker USD and lower US rates tend to push capital back toward higher-yielding Asian markets. This supports equities, bonds, and regional currencies.
- Borrowing costs for corporates and consumers may ease.
- REITs and dividend sectors could see renewed interest.
- Investors might rebalance into higher-yielding Asian opportunities.
For investors, a December cut reshapes asset allocation strategies right before the new year.
What to Watch Next
- Upcoming labour and inflation prints
- Further remarks from Fed officials
- Treasury market reactions
- Any signs of economic reacceleration that could delay the cut
December isn’t locked in — but it’s firmly back on the table. And if the data keeps softening at the margins, the Fed may choose to act sooner rather than later.