Fed December rate cut odds are rising after Bank of America told clients the central bank could move again even if the government shutdown prevents fresh jobs and inflation data from arriving in time. With only September’s CPI published during the stoppage—and a raft of labor indicators stuck in limbo—policymakers may head into the final meeting of the year with limited visibility.
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BofA economists Aditya Bhave and Matthew Yep mapped out scenarios that keep a December move in play. A slim majority of officials, likely including Chair Jerome Powell, already viewed downside labor-market risks as significant enough to justify at least 75 basis points of cuts this year, they wrote. In their view, absent new evidence, that cohort would prefer to follow the September dot plot rather than pause and wait for lagging releases.
At the same time, a hawkish bloc is poised to resist additional easing without fresh confirmation that growth and employment are weakening. Seven FOMC participants penciled in only one cut for the year. BofA expects four of those—Michael Barr, Austan Goolsbee, Alberto Musalem and Jeffrey Schmid—to hold the line, potentially setting up a split vote if the committee contemplates a third move.
Why a Fed December rate cut is plausible even while ‘flying blind’
The policy debate is being shaped by two conflicting realities:
- Inflation progress: September CPI rose 0.3% month over month, putting the annual rate at 3%—a touch cooler than forecasts. Core CPI advanced 0.2% on the month and 3% on the year, slowing from the back-to-back 0.3% monthly gains in July and August.
- Data blackout: The shutdown has delayed most labor and activity reports. Without updated payrolls, unemployment, and spending figures, the committee risks overreacting or underreacting to trends it cannot fully see.
Bank of America argues that the committee’s center of gravity favors following through on prior guidance if there is no new evidence to the contrary. Some doves could also see the shutdown itself as amplifying downside risks to activity, bolstering the case for a Fed December rate cut even in the absence of fresh data.
Hawks may tolerate one more move this week if that has already been signaled, BofA said, but “a third cut might be a step too far,” particularly if state jobless claims remain steady. The bank anticipates at least one hawkish dissent in December, alongside a likely dovish dissent from Miran, should the committee lean into additional easing.
Scenarios BofA lays out for a Fed December rate cut
BofA’s roadmap hinges on when, and how much, data arrive before the meeting:
- If the shutdown ends by late November and the Bureau of Labor Statistics releases a delayed September jobs report before the meeting: A single strong print will not convince Powell to go back on hold, BofA said. The bias toward a Fed December rate cut would likely persist.
- If both September and October labor reports become available: A pause could be considered if the unemployment rate stays flat at 4.3% and activity data look solid.
- If the shutdown ends early enough for BLS to fully catch up, including November data: The decision pivots on the unemployment rate.
- At 4.3%: Still-compatible with easing given downside risks.
- Closer to 4.5%: Strengthens the case for a Fed December rate cut.
- At 4.4%: A close call that would hinge on broader data flow, including inflation.
Under all paths, CPI carries extra weight because it was one of the only major indicators permitted for release during the shutdown. The latest report, slightly softer than expected, solidified the near-term case for easing in BofA’s view.
What could derail a Fed December rate cut
Even with dovish momentum, several developments could slow or stop a move:
- A swift reopening that delivers unexpectedly strong jobs and earnings data for multiple months
- A re-acceleration in monthly core CPI prints, especially in shelter or services
- A deterioration in financial conditions reversing prior easing—such as a sharp equity rally coupled with falling credit spreads that reduces the need for stimulus
- Clear pushback from multiple hawks, raising the risk of a fractured committee and signaling a higher bar for additional action
Conversely, sustained or rising jobless claims, softer payroll growth, and tame core inflation would reinforce the bias toward a Fed December rate cut.
How CPI and unemployment shape the decision
The committee’s reaction function remains anchored in the dual mandate:
- Inflation: At 3% year over year, headline CPI is still above target but trending down. Core CPI’s 0.2% monthly gain in September is constructive. If subsequent months (when available) confirm moderation, inflation would not block a Fed December rate cut.
- Employment: The path of the unemployment rate around 4.3% to 4.5% is critical. A drift higher—alongside softer hiring and hours—would validate pre-existing concerns about labor-market downside risks.
BofA’s read is that Powell will not abandon the plan based on a single better-than-expected report arriving late. A broader pattern would be required to shift course.
What a Fed December rate cut means for markets and households
Policy choices at year-end tend to set the tone for the first quarter. If the committee proceeds:
- Rates and bonds: Front-end yields could slip further, with the curve weighing the likelihood of additional moves in early 2026.
- Equities: Growth-sensitive sectors may extend gains, though leadership will depend on earnings resilience.
- Credit: Lower policy rates can support issuance and spreads, but the balance of risks hinges on growth.
- Mortgages and consumer loans: A Fed December rate cut can filter through to lower borrowing costs over time, though lenders may price cautiously if labor conditions weaken.
If the committee pauses, markets will likely focus on the statement language, Summary of Economic Projections, and Powell’s press conference for clues on timing and thresholds for further easing.
Hawk vs. dove: where the dots and voices may land
BofA’s note highlights a likely split:
- Dovish camp: Officials prioritizing labor downside risks and seeking to “follow through on the September dot plot,” particularly if the shutdown’s uncertainty clouds activity.
- Hawkish camp: Participants who penciled in only one cut this year and see limited justification for moving again without confirming evidence. BofA names Barr, Goolsbee, Musalem and Schmid as likely to hold that view.
Expect the vote math to be sensitive to any last-minute releases—delayed payrolls, revisions, or jobless claims—alongside the tone of incoming ISM, retail, and housing indicators if they post before the meeting.
The shutdown’s policy wrinkle: decisions with incomplete information
A prolonged shutdown complicates policymaking beyond data scarcity:
- Seasonal adjustment and revision risks grow when releases bunch up.
- Real-time indicators (card spending, private payroll trackers) take on outsize importance despite noisier signals.
- Communications risk rises, as the committee must explain decisions without the usual dashboard.
That puts a premium on consistency. A Fed December rate cut aligned with the prior dot plot can be framed as honoring guidance while remaining data-dependent, lowering the odds of surprise.
What to watch in the days ahead
Key markers that could sway the path into the meeting:
- Government reopening timeline and BLS release calendar updates
- State-level jobless claims trends and continuing claims
- Any delayed payrolls data for September and October, plus revisions
- Updated CPI or PCE inflation signals if permitted
- Fedspeak from centrist voters clarifying tolerance for moving with limited data
Markets will also parse how many participants emphasize a risk-management approach—easing to insure against labor softness—versus those calling for patience until the data gap closes.
Bottom line
The case for a Fed December rate cut is intact, according to Bank of America, even if the shutdown leaves policymakers navigating with fewer instruments than usual. Softer CPI, rising focus on labor downside risks, and a desire to follow the September dot plot all support an additional move. A small but vocal hawkish bloc could register dissent—especially if jobless claims remain steady—but BofA sees the center of the committee leaning toward action unless multiple strong reports land in time.
Whether the Fed cuts or pauses, communication will be pivotal. With data distorted or delayed, explaining the balance of risks—and the thresholds for future moves—may matter as much as the decision itself. Daily Known will continue tracking the shutdown timeline, release calendars, and FOMC signals as December approaches.
FAQ’s
Will there be a Fed December rate cut?
Bank of America says a cut remains likely, with a slim majority inclined to follow the September dot plot; expect at least one hawkish dissent if a third cut is proposed.
How does the government shutdown affect the Fed’s decision?
It delays key jobs data, so the Fed may rely on prior guidance and risk management. A single late strong report is unlikely to shift Powell back to a pause.
What data points matter most for a December move?
Unemployment near 4.3% supports easing; closer to 4.5% strengthens the case. September CPI at 0.3% m/m and core at 0.2% m/m also favor a cut if the trend holds.
How would a December rate cut impact markets and borrowers?
Likely lower front‑end yields, some relief for mortgages/consumer loans over time, and supportive risk sentiment—contingent on growth and labor trends.
Article Source: Investing
