Why the market is pricing in a Fed rate cut for December

Economic Data and Federal Reserve Outlook - The September PCE report indicated inflation rose 2.8% year-over-year, the fastest pace since spring 2024, and is the last major economic data before the Federal Reserve's December meeting [1] - Investors anticipate the Fed will cut rates on December 10th, with expectations of a potential hawkish cut due to inflation concerns [2][6] - The Fed is expected to have room for further cuts, with inflation projected to decrease from close to 3% to around 2% next year [4][27] Inflation and Consumer Spending - Durable goods inflation has been affected by tariffs, which initially caused a decline but later increased [3] - Despite a significant increase in prices since the pandemic (over 20%), average hourly earnings have risen slightly more, though many individuals below the average have not kept pace with price increases [11][12] - Consumer spending has shown resilience, with $44 billion spent over five days during the holiday shopping period, indicating a disconnect between consumer behavior and economic data [53] Labor Market and Employment Trends - The unemployment rate remains low at 4.4%, suggesting full employment, despite concerns about job market softness [52] - Job growth is expected to average around 80,000 for 2026, with a potential pickup in hiring across cyclical sectors like retail and finance [85] - The job market is experiencing pressures from AI, which has replaced some entry-level positions and increased productivity, leading to hiring slowdowns [90] Market Dynamics and Investment Outlook - The market is expected to focus on the competitive landscape in AI, with a potential broadening of investment opportunities beyond the top tech stocks [21] - Economic growth is anticipated to benefit from significant stimulus, including tax cuts and celebrations for the 250th birthday of the United States, potentially leading to a double-digit increase in the S&P next year [9] - Concerns about affordability persist, particularly for lower-income consumers, which could impact political dynamics ahead of the midterm elections [13][15] Federal Reserve Leadership and Policy Implications - The potential nomination of Kevin Hasset as the next Fed chair raises questions about the future direction of monetary policy, though it is noted that he would only be one vote among many [30][78] - The Fed's credibility has improved, with members showing unity in recent decisions, which may support a more dovish approach in the future [81][82] - The Fed's Beige Book indicates mixed signals in consumer spending and hiring, which may influence their decision-making in the upcoming meeting [87][92]