December FOMC Preview: Rate Cut Priced in but Tone is Everything

If there’s one economic event investors should follow, it’s the action of central banks. Legendary billionaire investor Stanley Druckenmiller, who has never suffered a down year in more than 30 years on Wall Street, said it best when he said:

“Earnings don’t move the overall market; it’s the Federal Reserve Board…focus on the central banks, and focus on the movement of liquidity… most people in the market are looking for earnings and conventional measures. It’s liquidity that moves markets.”

The Federal Open Market Committee (FOMC) will announce the latest interest rate decision on Wednesday, December 12^th at 2:00 pm EST. A half hour later, Federal Reserve Chair Jerome Powell will provide comments and take questions from the media.

Recent Fed Funds Effective Rate History

Between 2022 and 2023, Jerome Powell and the U.S. Federal Reserve Board raised interest rates aggressively to stave off high inflation, the highest that occurred in over 40 years. By late 2023, the Fed finally brought down inflation and paused any rate action. Finally, in September, the Fed cut interest rates for the first time in nearly three years, kicking off the current easing cycle.

December FOMC: What to Expect

The options market implies a post-FOMC move of +/- 1% in the S&P 500 Index. According to the betting market Polymarket, there is a 95% chance that the Fed will cut interest rates by 25 basis points.

Meanwhile, the CME FedWatch Tool, which uses the 30-day Fed Funds futures prices to predict the next Fed move, predicts an 89.20% chance of a quarter-point interest rate cut.

Powell Commentary: What to Look for

With a 25-bps interest rate cut all but priced in, Wall Street investors will shift their focus to Fed Chair Powell’s press conference. Currently, there are a handful of crosscurrents that Powell will likely discuss, including a softening jobs market, how tariffs are impacting inflation, and strong GDP. The key for investors will be to decipher whether Fed Chair Powell delivers a “dovish” or “hawkish” interest rate cut. In other words, will investors expect more interest rate cuts in early 2026? Finally, another important variable for investors to track is how the recent government shutdown will impact monetary policy moving forward.

Following FOMC, investors should monitor how rate-sensitive stocks such as Carvana (CVNA), Lennar (LEN), Bank of America (BAC), Newmont Mining (NEM), and the Russell 2000 Index ETF (IWM) perform.

Bottom Line

On Wednesday, the Federal Reserve will take center stage. With a rate cut widely expected, the real story will be expectations for 2026 and how the Fed balances softening employment data with ongoing economic strength.

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This article originally published on Zacks Investment Research (zacks.com).

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