Dovish Fed Signals Drive Surge in Rate-Cut Expectations — Evening Brief – 12.02.25
Investor sentiment over the likelihood of another Federal Reserve rate cut has swung sharply back toward the dovish camp, following a new round of policy signals from senior central bank officials. After weeks of uncertainty—and futures markets briefly assigning a near–50/50 probability—recent commentary has tilted expectations decisively in favor of a third consecutive policy easing at the December 9–10 FOMC meeting.
New York Fed President John Williams offered the strongest indication yet that policymakers remain focused on softening labor-market conditions rather than inflation pressures. Williams emphasized that inflation risks have receded and said there is room for further near-term adjustment to the federal funds rate to bring policy closer to neutral. Such a move, he argued, would better balance the Fed’s dual mandate at a time when “labor market weakness” is becoming more evident.
Fed Governor Christopher Waller reinforced that stance, signaling his continued support for a rate cut next week. Since the last policy meeting, he said, incoming private-sector and anecdotal data show that “the labor market is soft” and “continuing to weaken,” with inflation expected to ease further. Those conditions, he argued, justify additional accommodation.
Their comments ignited a swift repricing in interest-rate derivatives. Fed funds futures, which only recently implied a toss-up for December, now assign an 87% probability to another rate cut—effectively declaring consensus around further easing. Traders now expect the Fed to maintain a dovish trajectory well into early 2026 unless labor-market dynamics materially improve.
The shift has fueled a broad bond-market rally, driving yields lower and lifting investment-grade fixed income. The Vanguard Total Bond Market ETF (BND)—a benchmark proxy for U.S. investment-grade bonds including Treasuries, agencies, and corporates—is nearing its previous high. The fund has gained 7.2% year-to-date and is poised to post its third consecutive calendar-year increase. If sustained, the current rally will mark BND’s strongest annual performance since 2020, when pandemic-era rate cuts powered a historic surge in high-quality bonds.
Not all Fed officials are aligned with the new dovish momentum. Boston Fed President Susan Collins reiterated that she remains “hesitant” to support another reduction. After two 50-basis-point cuts in September and October, she believes policy is now in a “mildly restrictive” and appropriate range given the economy’s resilience. Her comments position her among the more hawkish voices on the Committee, even as the market increasingly views such perspectives as a minority.
With the countdown to the December meeting underway, investors are bracing for confirmation of whether the Fed will validate the market’s dovish shift—or surprise with a more cautious stance.