Imminent US Federal Reserve Rate Cut: How Global Markets Are Repricing Risk
Investors are now betting heavily that the US Federal Reserve will cut interest rates again in December, forcing a rapid repricing across bonds, equities, currencies and commodities – with big implications for the UK and the rest of the world.
Key Points
Markets now price a very high probability that the Federal Reserve will cut rates by 0.25 percentage points at its December meeting.
The Fed has already cut twice this autumn, taking the federal funds target range down to 3.75–4.00%, and a December move would lower it to 3.50–3.75%.
Expectations of easier US policy have driven sharp moves in global bond yields, the US dollar, gold and equity indices, with risk assets recovering.
For the UK, a more dovish Fed coincides with a Bank of England Bank Rate at 4%, influencing gilt yields, sterling and future mortgage pricing.
The key risk is that markets may be moving ahead of central banks, leaving room for volatility if inflation or growth data surprise.
Background and Context
From “higher for longer” to an easing cycle
For most of 2024 and early 2025, global markets were dominated by expectations of prolonged high US interest rates. After a rapid hiking cycle to combat post-pandemic inflation, the Fed kept the federal funds rate at elevated levels for an extended period.
That stance has shifted in recent months:
In September, the Fed delivered its first 0.25 percentage point cut.
In October, it cut again to 3.75–4.00%, signalling the beginning of a cautious easing cycle.
At the same time, US inflation has been drifting closer to the Fed’s 2% target and growth has slowed toward a more sustainable pace.
Why this December meeting matters
The December Federal Open Market Committee meeting sits at the intersection of:
Slowing US economic momentum,
Labour market data softening in places, and
Investors eager for confirmation that the rate-hiking era is over.
Fed officials remain divided: some have hinted that more cuts are appropriate if inflation continues to fall, while others warn against easing too quickly. Markets are trying to interpret this tension in real time.
What Has Happened: Markets Race Ahead of the Fed
Futures markets: an “imminent cut” priced in
Interest rate futures now imply that a December cut is highly likely. If delivered, the target range would move to 3.50–3.75%, closer to many estimates of the “neutral” rate.
Bonds: yields fall, then wobble
Fixed-income markets have reacted sharply.
US Treasury yields fell through the second half of 2025 as investors anticipated a sequence of cuts.
Yields have stabilised more recently as some analysts question whether markets are overly optimistic.
In Japan and parts of Europe, long-dated yields have also retreated as investors reposition for a softer global rate environment.
Currencies: a softer dollar, stronger pound
The US dollar has weakened from recent highs as expectations build for lower US rates.
The pound has strengthened against the dollar, supported by a combination of US rate-cut expectations and the perception that the Bank of England may cut at a slower pace. For UK investors, this affects returns on US assets and shifts the balance between UK and US fixed-income opportunities.
Equities and risk assets: eyeing a “Santa rally”
Global equities have risen on hopes of a gentler policy stance, though volatility remains.
US indices, including the S&P 500, are hovering near record levels.
Asian markets are more mixed, with strong performance in Japan and more caution in parts of Asia-Pacific.
Gold prices have eased slightly while oil markets continue to respond more to geopolitical factors than monetary policy.
Why It Matters – and Who It Affects
Borrowers vs savers
A lower US policy rate affects borrowing and saving worldwide:
Borrowers may benefit from cheaper dollar-denominated funding as global interest rates ease.
Savers will see returns on cash-like instruments drift down as yields fall.
UK angle: gilts, mortgages and sterling
For the UK, the Fed’s direction has meaningful spillover effects:
The Bank Rate remains at 4%, with further cuts possible in 2026 if inflation continues to improve.
Gilt yields tend to move broadly with US Treasury yields, influencing the price of government borrowing.
Mortgage rates, particularly fixed-rate deals tied to gilt or swap markets, may ease if global yields continue to fall.
Sterling could strengthen further if markets expect the Bank of England to remain relatively tighter than the Fed, improving the appeal of UK assets.
Emerging markets
Emerging markets are highly sensitive to US policy. Lower US rates can stabilise EM currencies, reduce capital outflow pressure, and allow gradual domestic rate cuts. But conditions vary widely—some EM economies already face weak growth and currency pressures, making the impact uneven.
Big Picture: The Repricing of Risk
From inflation fear to growth risk
During the tightening cycle, inflation was the central concern. Now the focus is shifting to growth risks and policy credibility.
Cut too slowly: growth may falter, risking a harder landing.
Cut too quickly: inflation could re-accelerate, forcing an abrupt reversal.
Markets are navigating this tightrope, and prices reflect both optimism and caution.
Valuations, bubbles and “search for yield 2.0”
As policy rates fall, investors move back into longer-duration and higher-risk assets.
Government bonds may again serve as reliable diversifiers.
Equities and credit benefit from lower discount rates, though valuations can stretch.
Alternative assets may become attractive if cash yields decline significantly.
The new challenge for investors is redeploying cash that has enjoyed unusually high returns over the past two years.
What to Watch Next
1. The December statement and projections
Beyond the headline cut, markets will watch for clues about:
Whether more easing is likely early in 2026.
How the Fed updates its forecasts for inflation, growth and the path of interest rates.
2. Inflation and labour market data
Upcoming inflation readings, especially for core services, and labour market indicators such as wage growth and unemployment will shape expectations.
3. Bank of England and European Central Bank responses
The Bank of England’s December decision will be influenced by the Fed’s move. The key considerations will be:
How closely UK policy should track US policy,
Whether domestic inflation risks justify a slower pace of cuts,
The impact on gilts, sterling and UK mortgage markets.
The ECB faces similar questions, shaping conditions across the eurozone.
4. Market positioning and volatility
Markets are currently positioned for cuts. If data surprise, large one-day swings are possible. Monitoring bond and FX volatility will provide clues about investor confidence—or nerves.
Conclusion: A Turning Point, Not the End of the Story
A December rate cut from the Federal Reserve would confirm that the inflation shock of the early 2020s is steadily fading. But the real story lies in the path ahead: how quickly rates might fall through 2026, and how markets adapt to a new balance of risks.
For investors, policymakers and households, the message is clear: don’t focus solely on the next cut. Pay attention to how expectations evolve. That is where the deeper shifts in global markets are unfolding.
