Will the Stock Market Break Down if the Fed Disappoints?
Will the Stock Market Break Down if the Fed Disappoints?
By:Ilya Spivak
Stocks got cold feet as markets braced for the year’s last policy action from the Federal Reserve
- Wall Street started the week on defense with the Fed meeting in focus
- A rate cut looks priced in, putting more speculative weight on 2026 bets
- Stocks are at risk, but the US dollar might rise if the FOMC disappoints
Stock markets turned lower as all eyes turned to a much-anticipated interest rate decision from the Federal Reserve. The bellwether S&P 500 fell 0.33%, its largest drawdown in a week. A similar fate was in store for the tech-tilted Nasdaq 100. It gave up 0.26%.
At the same time, Treasury bond rates powered higher. While gains appeared across the maturity spectrum, the long end of the yield curve saw outsized support. Tellingly, the markets seemed to grow more confident in the likelihood that the US central bank will deliver a rate cut this week even as they pared back stimulus bets for next year.
Markets shudder before a critical Fed rate decision
Benchmark Fed Funds futures put the probability of a 25-basis-point (bps) reduction at this week’s gathering of the rate-setting Federal Open Market Committee (FOMC) at 89.4%. That’s the second highest setting since policymakers last issued a policy decision on October 29, and by narrow margin (the high so far was marked on December 3 at 90%).
However, the projected tally for 2026 dropped to just 52bps, the lowest in six months. That implies two standard-sized rate cuts on the menu next year. It stood as high as 65bps last week, and averaged 61bps. This means that the probability of a third cut has dropped to near zero after showing better-than-even odds mere days ago.
This shift and its broader consequences across major markets may amount to protective prepositioning ahead of this week’s announcement. The central bank projected just 25bps in stimulus next year when it updated its Summary of Economic Projections (SEP) in September. Perhaps traders were of a mind to tactically curb their enthusiasm.
Will Powell and the FOMC give stocks what they want?
That seems to make sense after Fed Chair Jerome Powell and many of his colleagues have loudly signaled that they are not eager to make big-splash changes while timely economic data remains scarce. Timely government statistics are still scarce after the longest-ever US government shutdown, from October 1 to November 12.
With the bar on what the markets would consider acceptably dovish now seemingly lowered, it is the Fed’s turn to ante up. To hear Mr. Powell tell it, the FOMC is finely split. A rate cut to placate the doves may thus come at the cost of keeping the 2026 outlook limited to a single rate cut, as if to make a point about intent without committing to scale.
The markets appear to be showing themselves vulnerable to just such a scenario. Stocks may be faced with greater selling pressure if the Fed refuses to meet traders halfway. Gold and bitcoin prices may see a haircut too. On the other hand, the US dollar may ride the tailwinds of friendlier rates and risk aversion higher.
Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak
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