In light of today’s inflation report, traders in short-term interest-rate futures have raised their expectations for a potential Federal Reserve rate cut in December. Now, markets are pricing in an 80% probability for a quarter-point reduction, pushing the rate target to 4.25%-4.5%, a notable increase from the roughly 60% likelihood prior to the report.

December Rate Cut More Likely, Slower Reductions Expected in 2025

Market sentiment reflects a belief in a more measured pace of rate reductions next year. Analysts expect the Fed to ease further until the rate reaches the 3.75%-4% range, at which point a pause may be considered.

“Unless we see unexpected economic shifts, another 25-basis-point cut in December seems probable, with a gradual approach to further easing into 2025,” stated Solita Marcelli, Chief Investment Officer Americas at UBS Global Wealth Management.

Strategic Shifts for Investors Amid Fed Easing

Marcelli advises investors to shift excess cash into high-quality fixed income assets or diversified fixed income strategies to increase portfolio yield. “U.S. equities remain an attractive option given stable economic growth, Fed rate cuts, and strong investment trends in AI,” she added.

CPI Data in Line with Projections, Points to Slight Uptick

According to the latest U.S. Labor Department data, headline inflation saw a minor uptick in October, aligning with market expectations. The Consumer Price Index (CPI), a key measure of price movements in the U.S., rose 2.6% year-over-year, up from 2.4% in September, and recorded a 0.2% monthly increase, matching the previous month’s trend.

The core CPI, which excludes volatile food and energy prices, registered a 3.3% annual increase and a 0.3% monthly gain, maintaining the prior month’s figures. These inflation metrics will be central to the Fed’s decision-making process leading up to the December meeting.

Recent Fed Actions and Market Reactions

Last week, the Federal Reserve implemented a 25-basis-point rate cut, reducing the borrowing rate to 4.50%-4.75%. While acknowledging that inflation remains “somewhat elevated,” the Fed noted that risks to price stability and employment appear balanced.

This gradual yet consistent easing approach by the Fed aims to support sustained economic growth while keeping inflationary pressures manageable. With markets already reacting to this data, investor focus remains on fixed income opportunities and sectors poised to benefit from stable growth and evolving rate policies.