The probability of the Federal Reserve cutting interest rates in December has fallen below 50%, marking a significant shift in market expectations. This decline comes after weeks of traders pricing in a high likelihood of a rate cut at the Federal Open Market Committee's (FOMC) December 10th meeting.

According to the CME FedWatch Tool, the odds of a 25-basis point rate cut in December are now around 47.4% to 50%, a steep drop from 95% just a month ago. This considerable change reflects a growing divergence among Federal Reserve officials regarding the future path of monetary policy, coupled with the impact of recent disruptions to economic data caused by the U.S. government shutdown.

Several factors contribute to this shift in expectations. The recent government shutdown limited the availability of crucial economic data, leaving Federal Reserve officials in a position where they feel they are "flying blind". The White House has also indicated that some October labor market and inflation data may not be released, further complicating the picture. This lack of clarity makes it more difficult for the Fed to assess the state of the economy and make informed decisions about interest rate adjustments.

Furthermore, recent commentary from Fed officials has leaned towards a more cautious, or "hawkish," stance. Voting FOMC member Susan Collins expressed hesitation about further rate cuts given the limited data on inflation, stating that "absent evidence of a notable labor market deterioration, I would be hesitant to ease policy further". Similarly, Cleveland Fed President Beth Hammack suggested the Fed needs to "remain somewhat restrictive" to bring inflation down, while Atlanta Fed President Raphael Bostic emphasized that inflation continues to pose the most urgent risk to economic stability.

These concerns about inflation are occurring even though inflation was at 3.0% year-on-year in September, which was below forecasts, but still suggests that inflationary pressures remain.

The Federal Reserve has already cut rates at its last two meetings, bringing the federal funds rate down to a range of 3.75%–4%. However, Fed Chair Jerome Powell has emphasized that another rate cut in December is "not a foregone conclusion, far from it". This statement, combined with the other factors, has led traders to adopt a more cautious approach regarding the possibility of a year-end rate cut.

Adding to the uncertainty is a selloff in the stock market, particularly in tech stocks, driven by concerns about overstretched valuations. This market volatility further complicates the Fed's decision-making process, as it must consider the potential impact of its policies on financial markets.

With about four weeks remaining until the next FOMC meeting, a series of key economic reports are scheduled for release. These reports could provide more clarity on the state of the economy and potentially shift market expectations once again. However, for now, the odds of a December rate cut remain uncertain, and the Federal Reserve's next move is far from clear. As Dominic Pappalardo, chief multi-asset strategist for Morningstar Wealth, notes, "The voting Fed members were already split on whether more rates cuts are warranted, and the lack of consistent economic data can compound the dissention". He added that the Fed will have less data than usual at their December 2025 meeting, which may complicate the decision-making process.