Financial markets are at a critical juncture ahead of the Federal Reserve’s policy announcement, with expectations centered on a hold in the federal funds rate. Traders are closely monitoring inflation data and economic indicators for clues on the path forward.
- Federal funds rate held at 5.25%–5.50% with 78% probability of no change
- Core PCE inflation at 2.8% YoY, above Fed's 2% target
- ISM Services Index at 49.2, indicating contraction
- 10-year Treasury yield at 4.32%, 2-year at 4.55%
- TLT down 1.8% over five days, reflecting rate cut delay expectations
- USD strength seen in DXY (106.1) and EUR/USD (1.0745)
Markets are in a state of heightened anticipation as the Federal Reserve prepares to release its latest policy decision, with the S&P 500 (SPX), Dow Jones Industrial Average (DJI), and Nasdaq Composite (IXIC) all showing elevated pre-event volatility. Investors are pricing in a 78% probability of no change to the federal funds rate, currently at 5.25%–5.50%, despite recent inflation prints that remain above the Fed’s 2% target. The central bank faces a delicate balancing act: maintaining inflation control while avoiding a sharp downturn in economic activity. Recent data shows core PCE inflation at 2.8% year-over-year, and job growth has held steady at 185,000 new positions per month on average through November. These figures suggest persistent inflationary pressures, yet consumer spending and industrial output have shown signs of softening, with the ISM Services Index dipping to 49.2 in November—the first contraction in the sector since 2020. Bond markets are reflecting this uncertainty. The 10-year Treasury yield has climbed to 4.32%, up 12 basis points from last week, while the 2-year yield stands at 4.55%. The iShares 20+ Year Treasury Bond ETF (TLT) has declined 1.8% in the past five trading sessions, signaling expectations of delayed rate cuts. Meanwhile, the U.S. dollar (USD) has strengthened, with the DXY index rising to 106.1, and EUR/USD falling to 1.0745, indicating a flight to safety amid policy uncertainty. Equity sectors are reacting differently: financials and utilities—both sensitive to interest rate movements—have posted modest declines, while technology stocks, which benefit from lower long-term rates, are mixed. Energy and consumer discretionary sectors have shown resilience, supported by persistent demand and steady retail sales data.