The Federal Reserve's messaging took a notably dovish turn Friday, sending traders scrambling to reprice interest rate expectations. What looked like a coin flip just 24 hours earlier now appears almost certain: markets are pricing in a 74% chance of a December rate cut.
The shift was dramatic. According to the CME FedWatch tool, odds of a 25-basis-point reduction at the Dec. 10 policy meeting rocketed up from a mere 25% on Thursday. The catalyst? A coordinated wave of dovish commentary from key Fed officials who seemed intent on pushing back against recent hawkish chatter.
Williams Shifts Focus to Employment Concerns
New York Fed President John Williams led the charge Friday morning, arguing that recent inflation worries have been overblown while labor market risks deserve more attention. "The downside risks to employment have increased as the labor market has cooled," Williams said, adding that "upside risks to inflation have lessened somewhat."
His remarks represented a clear break from the cautious, wait-and-see tone other Fed officials struck earlier in the week. Williams made clear he still sees "room for a further adjustment in the near term to the target range for the federal funds rate" to move policy closer to neutral territory.
On tariffs—a key source of recent inflation anxiety—Williams took a measured stance, acknowledging they've contributed to higher prices but insisting they are "not expected to lead to persistent inflation." The message: don't confuse temporary price shocks with sustained inflationary pressure.
Miran Goes All In on December Cut
Fed Governor Stephen Miran didn't mince words. Speaking on Bloomberg, he said he would "absolutely vote for [a] 25 basis points cut" in December, citing Thursday's September jobs report as further evidence that cuts are warranted.
"I think the implications of yesterday were obviously dovish, and if anyone was on the fence, I would hope that this would move them in the direction of cutting," Miran said. "Those are indications that the labor market has been affected by restrictive Fed policy."
Miran also challenged the reliability of current inflation readings, suggesting much of the data is either outdated or misleading. He stressed that monetary policy works with long lags—Fed decisions today won't fully impact the economy for 12 to 18 months. "It doesn't make sense to be setting policy for where the economy was three or six months ago," he argued. "We should be setting policy based on where the economy is likely to be."
Markets Catch Their Breath
After Thursday's bruising selloff, stocks found some footing. The S&P 500—tracked by the Vanguard S&P 500 ETF (VOO)—climbed 0.2% by mid-morning Friday, recovering from the previous day's 1.6% decline. The Nasdaq 100, represented by the Invesco QQQ Trust (QQQ), traded roughly flat after dropping 2.2% on Thursday.
Bond markets moved more decisively. The 2-year Treasury yield fell 3 basis points to 4.50%, while the 10-year yield dropped 2 basis points to 4.06%. The U.S. dollar edged lower as rate cut expectations gained traction.
The repricing reflects a fundamental shift in how markets are thinking about Fed policy. Just days ago, sticky inflation data had traders second-guessing whether the Fed would cut at all this year. Now the debate has shifted to whether December's cut might be the first of several in 2025.
