Here's Why Dec. 10 Could Be a Big Day for the Stock Market

Wednesday, Dec. 10, could turn out to be a very big day for the stock market and equity investors. That's the day the Federal Reserve's interest-rate-setting committee -- the Federal Open Market Committee (FOMC) -- will convene its final meeting of the year and announce whether it will cut its benchmark interest rate one last time in 2025.

As most investors are aware, the Fed's interest-rate decisions can have huge consequences for the stock market. A cut on Dec. 10 to the federal funds rate would likely push the market higher, while a decision to leave the rate at its current level would be a major disappointment and probably send indexes sharply lower. A hike to the rate is extremely unlikely.

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Future guidance is conflicted

Often, the Fed telegraphs exactly what it will do far in advance of an FOMC meeting, but this time is a bit different. In recent weeks, there has been considerable uncertainty in the market about whether the FOMC will cut its benchmark interest rate again at its final meeting of the year.

At its last meeting, which took place in late October, the FOMC cut the benchmark rate by a quarter of a percentage point. That should have been a reason for investors to cheer.

However, Fed chair Jerome Powell rained on Wall Street's parade by suggesting in his post-meeting press conference that a December cut was no sure thing, even though the market had been expecting another cut at the next meeting. "A further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it," he told reporters. That sent stocks and the S&P 500 index lower.

However, last Friday, Nov. 21, the president of the Federal Reserve Bank of New York, John C. Williams, hinted in a speech that another cut is likely in December. Williams, who heads the most important Federal Reserve bank and so has a bigger megaphone than most Fed officials other than Powell, said the current fed funds rate is "modestly restrictive" -- meaning that it's slowing economic activity at a time when the labor market has cooled off.

Growing confusion in the futures market

And so, Williams concluded, there is "room for a further adjustment in the near term to the target range for the federal funds rate to move the stance of policy closer to the range of neutral." That's Fed speak for "a December cut is probably appropriate."

Between Powell's press conference remarks in October and Williams' speech last week, the market is now officially confused. A month ago, before Powell spoke, futures traders put the odds of a December rate cut at near-certainty, 98.1%. After he spoke that fell dramatically to 44.4% (as of Nov. 14). Now, after Williams' Friday speech, traders have jacked the chances of a cut back up to 71.4%. Those are major and unusually large shifts just a few weeks before an FOMC meeting, and they signal that the market doesn't really know what to expect.

And that uncertainty about what the Fed will do on Dec. 10 creates fertile ground for a major move in markets that day.

Investors, please fasten your seatbelts: We may experience turbulence ahead.

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