Finance
Markets rethink December rate cut amid Fed doubts
Federal Reserve Chair Jerome Powell speaks during a news conference following a meeting of the Federal Open Market Committee at the Federal Reserve on Oct. 29, 2025 in Washington, DC.
Alex Wong | Getty Images
Federal Reserve Chair Jerome Powell wasn’t kidding a couple weeks ago when he said a December rate cut wasn’t in the bag.
Recent remarks from Powell’s colleagues point to plenty of apprehension over whether the central bank should deliver its third consecutive easing of policy when it meets Dec. 9-10.
As a result, markets have recalibrated their expectations. Whereas traders as recently as a few days ago were pricing in at least a 2-to-1 probability of a quarter percentage point cut, that’s now flipped to a coin toss, according to futures markets readings tabulated by the CME Group in its FedWatch tool.
“These developments chip away at our confidence the Fed will cut in [December] without giving us any more confidence a skip to [January] is a better bet,” Krishna Guha, head of global policy and central bank strategy at Evercore ISI, said in a note. “This leaves us still seeing a [December] cut more likely than not but only 55-60 per cent.”
As of Thursday afternoon, the implied probability of a rate cut was at 49.4%, according to the CME gauge that uses prices on 30-day fed funds futures contracts to interpolate probabilities for rate moves. Futures prices pointed to a funds rate of 3.775% by the end of 2025, compared to the current level of 3.87%.
A month ago, the market was assigning a 95% probability of a reduction.
So what changed? Primarily, uncertainty at a time when the official data flow came to a halt due to the now-resolved government shutdown. Some Fed officials worry about flying blind on data at a time when the most recent readings point to a softening labor market but inflation that, while ebbing slightly, is still considerably above the Fed’s 2% target. Moreover, White House press secretary Karoline Leavitt said Wednesday that some of the data, particularly for October, may never come out.
An unexpected voice
Those reservations showed up in an uncharacteristically blunt assessment Wednesday from Boston Fed President Susan Collins.
During her time with the Fed, Collins has used cautious language to express her opinion on policy. But a speech she delivered in her home district left little doubt regarding her misgivings about inflation and the importance of the Fed to hold steady, at least for now, until there’s greater economic clarity.
“Given my baseline outlook, it will likely be appropriate to keep policy rates at the current level for some time to balance the inflation and employment risks in this highly uncertain environment,” Collins said. “I see several reasons to have a relatively high bar for additional easing in the near term.”
A central part of her case is that the economy generally looks solid even with the slowdown in hiring. Cutting rates more, Collins reasoned, risks pushing inflation higher at a time when the impact from tariffs is still uncertain.
“The current level of policy rates, in my view, leaves policy well positioned to address a range of potential outcomes and balance risks on both sides of our mandate,” she said, referring to the Fed’s dual mandate to maximize employment and keep prices stable.
Collins’ position puts her in a hawkish group that includes regional presidents Jeffrey Schmid of Kansas City who, unlike Collins, voted against the October cut, along with Beth Hammack of Cleveland and possibly Alberto Musalem of St. Louis and Lorie Logan in Dallas.
On the opposite side of the rate fence are Governors Stephen Miran who, in his two meetings, has voted against quarter-point cuts in favor of half-point reductions, as well as Christopher Waller and Michelle Bowman.
Chair Powell, then, is left to build consensus following his comments after the October rate cut that “a further reduction in the policy rate at the December meeting is not a foregone conclusion—far from it.” There is no Fed policy meeting in November.
Taking sides
As markets grew less confident about a December cut, stocks slumped Thursday while Treasury yields moved higher.
Powell’s dilemma at a time of uncharacteristic dissent on the Federal Open Market Committee is intensifying.
“We do not think Powell wants the Committee to break apart deeply and publicly with mass hawkish
dissents at this institutionally perilous moment,” Guha said. “This in our view is why he and his top deputies [FOMC Vice Chair Philip] Jefferson and [New York Fed President John] Williams have adopted a conciliatory posture, respecting hawks’ arguments and insisting the market view [December] as a 50-50 call.”
One middle ground for the Powell would be a “hawkish cut,” in which the committee would agree to one more reduction while the chair communicates that further moves lower are unlikely. The FOMC’s makeup changes in January when a new crop of regional presidents will move into voting roles, and as Powell’s term as chair nears its end in May. Gone will be hawks like Collins and Schmid, though both Hammack and Logan will move into voting roles.
“With all this in mind, we think that it is possible that Powell is forced into a compromise by which the Fed either (1) stays on hold in December, or (2) if it does cut, is obligated subsequently to signal that the rate cutting cycle may be over,” wrote Thierry Wizman, global FX and rates strategist at Macquarie Group.
Traders are anticipating the committee softens its stance come January. Futures pricing indicates about a 70% probability of a cut to kick off the new year should the FOMC decide to skip December.
Cybersecurity and enterprise software stocks have been market dogs in 2026, with fears that AI will wipe out a wide range of companies in the enterprise space dominating the narrative. But they snapped a brutal losing streak this past week, joining in the broader market rally that saw all losses from the U.S.-Iran war regained by the Dow Jones Industrial Average and S&P 500.
Cybersecurity has been “a victim of some of the AI-related headlines,” Christian Magoon, Amplify ETFs CEO, said on this week’s “ETF Edge.”
It wasn’t just niche cybersecurity names. Take Microsoft, for example, which was recently down close to 20% for the year. Its shares surged last week by 13%.
A big driver of the pummeling in software stocks was a rotation within tech by investors to AI infrastructure and semiconductors and some other names in large-cap tech, Magoon said, and since cybersecurity stocks and ETFs are heavily weighted towards software companies, they were left behind even as those businesses continue to grow on a fundamental basis.
But Wall Street now has become more bullish with the stocks at lower levels. Brent Thill, Jefferies tech analyst, said last week that the worst may be over for software stocks. “I think that this concept that software is dead, and then Anthropic and OpenAI are going to kill the entire industry, is just over-exaggerated,” he said on CNBC’s “Money Movers” on Wednesday.
“Big Short” investor Michael Burry wrote in a Substack post on Wednesday that he is becoming bullish about software stocks after the recent selloff. “Software stocks remain interesting because of accelerated extreme declines last week arising from a reflexive positive feedback loop between falling software stocks and changes in the market for their bank debt,” he wrote.
The Global X Cybersecurity ETF (BUG), is down about 12% since the beginning of the year, with top holdings including Palo Alto Networks, Fortinet, Akamai Technologies and CrowdStrike. But BUG was up 12% last week. The First Trust NASDAQ Cybersecurity ETF (CIBR) is down 6% for the year, but up 9% in the past week.
Piper Sandler analyst Rob Owens reiterated an “overweight” rating on Palo Alto Networks which helped the stock pop 7% — it is now down roughly 6% on the year. Its peers saw similar moves, including CrowdStrike.
Performance of Global X cybersecurity ETF versus S&P 500 over past one-year period.
Magoon said expectations may have become too high in cybersecurity, and with a crowding effect among investors, solid results were not enough to to push stocks higher. But the down-and-then-back-up 2026 for the sector is also a reminder that when stocks fall sharply in a short period of time, opportunity may knock.
“Once you’re down over 10% in some of these subsectors, you start to see the contrarians start to say, ‘well, maybe I’ll take a look at this,'” Magoon said.
He said AI does add both opportunity and uncertainty to the cybersecurity equation, increasing demand but also introducing new competition. But he added, “I think the dip is good to buy in an AI-driven world,” specifically because the risks to companies may lead to more M&A in cyber names that benefits the stocks.
For now, investors may look for opportunity on the margins rather than rush back into beaten-up tech names. “I think investors are still going to remain underweight software,” Thill said.
But Magoon advises investors to at least take the reminder to keep an eye on niches in the market during pronounced downturns. “The best-performing are often the least bought and do the best over the next 12 months versus late-in-the-game piling on,” he said.
While that may have been a mindset that worked against the last investors into cybersecurity and enterprise software in mid-2025 when the negative sentiment started building, at least for now, it’s started working for the stocks in the sector again.
Meanwhile, this year’s biggest winner is also a good example of what can be an extended trade in either a bullish or bearish direction. Last year, institutional ownership of energy was at multi-year lows, Magoon said, referencing Bank of America data. “Reverse sentiment can be a great indicator,” he said.
But he cautioned that any selective buying of stocks that have dipped does have to contend with the risk that there is a potentially bigger drawdown in the market yet to come in 2026. That is because midterm election years historically have been marked by large drawdowns. “If you think it is bad right now, it could get a lot worse,” Magoon said. But he added that there’s a silver-lining in that data, too, for the patient investor. The market has posted very strong 12-month returns after midterm election drawdowns end. So, for investors with a longer-term time horizon and no need for short-term liquidity, Magoon said, “stick in there.”
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New innovation in the exchange-traded fund industry could come at a cost to investors during extreme conditions.
According to MFS Investment Management’s Jamie Harrison, ETFs involved in increasingly complex derivatives and less transparent markets may be in uncharted territory when it comes to violent downturns.
“Those would be something that you’d want to keep an eye on as volatility ramps up,” the firm’s head of ETF capital markets told CNBC’s “ETF Edge” this week. “As innovation continues to increase at a rapid pace within the ETF wrapper, [it’s] definitely something that we advise our clients to be really front-footed about… Lack of transparency could absolutely be an issue if we’re going to start seeing some deep sell-offs.”
His firm has been around since 1924 and is known for inventing the open-end mutual fund. Last year, ETF.com named MFS Investment Management as the best new ETF issuer.
“It’s important to do due diligence on the portfolio,” he said. “Having a firm that has deep partnerships, deep bench of subject matter experts that plays with the A-team in terms of the Street and liquidity providers available [are] super important.”
Liquidity as the real issue?
Harrison suggested the real issue is liquidity, particularly during a steep sell-off.
“We’ve all seen the news and the headlines around potential private credit ETFs. That picture becomes much more murky,” he added. “It’s up to advisors, to investors [and] to clients to really dig in and look under the hood and engage with their issuers.”
He noted investors will have to ask some tough questions.
“What does this look like in a 20% drawdown? How does this liquidity facility work? Am I going to be able to get in? Am I going to be able to get out? And if I’m able to get out, am I able to get out at a price that’s tight to NAV [net asset value], and what’s the infrastructure at your shop in terms of managing that consideration for me,” said Harrison.
Amplify ETFs’ Christian Magoon is also concerned about these newer ETF strategies could weather a monster drawdown. He listed private credit as a red flag.
“If your ETF owns private credit, I think it’s worth taking a look at, kind of what the standards are around liquidity and how that ETF is trading, because that should be a bit of a mismatch between the trading pace of ETFs and the underlying asset,” the firm’s CEO said in the same interview.
Magoon also highlighted potential issues surrounding equity-linked notes. The notes provide fixed income security while offering potentially higher returns linked to stocks or equity indexes.
“Those could potentially be in stress due to redemptions and the underlying credit risk. That’s another kind of unique derivative,” Magoon said. “I would very closely look at any ETF that has equity-linked notes should we get into a major drawdown or there be a contagion in private credit or something related to the banking system.”
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