Global markets are entering the final stretch before the Federal Reserve’s December 9–10 policy meeting with conviction building that the US central bank is preparing to pivot toward easing.
Fed watchers increasingly judge that interest rates, held at their most restrictive levels in over two decades, no longer align with an economy that is losing momentum on several fronts. Positioning across equities, bonds and currencies reflects a belief that the data now argues more forcefully for a recalibration of policy.
US labour market IS cooling
The labour market, long the backbone of the Fed’s argument for keeping rates elevated, is showing clearer signs of cooling. Although headline payroll figures remain positive, underlying indicators reveal weakening demand for workers.
Job vacancies have retreated sharply from their pandemic-era highs, hiring intentions are moderating and wage growth is slowing across industries. Corporate behaviour has shifted from aggressive recruitment to cautious adjustment, consistent with a labour market that is loosening rather than overheating.
With monetary policy operating on long lags, forward-looking indicators carry more weight than backward-facing headline statistics, reinforcing the case that restrictive settings risk becoming unnecessarily procyclical.
Household consumption, the most resilient pillar of the US recovery, is also showing signs of strain. The drawdown of excess savings accumulated during the pandemic has largely run its course, leaving consumers more dependent on credit at a time when borrowing costs remain elevated.
US consumer engine is no longer accelerating
Rising delinquency rates and greater selectiveness in discretionary purchases suggest that the consumer engine is no longer accelerating, even if it continues to propel overall activity. The shift represents an inflection point: the balance of risks has moved from inflationary overheating to the possibility of tightening conditions undermining demand more than policymakers intend.
Inflation dynamics have evolved meaningfully as well. Goods prices remain subdued, services inflation is trending lower in line with softer wage pressures and supply chains have normalised after several years of disruptions. While inflation is still above the Fed’s target, the probability of renewed upside shocks has diminished.
Policy rates were initially set for an economy running hot; that environment has faded, and the cost of maintaining overly restrictive settings is rising. With inflation risks retreating, growth stabilisation becomes a more prominent concern.
Financial markets preparing for an adjustment
Financial markets appear well prepared for a policy adjustment. Equity indices have rallied as expectations for easing have strengthened, with participation widening beyond defensive sectors into cyclical and growth-oriented areas. Investors interpret the prospective shift not as an emergency manoeuvre but as an orderly step toward aligning policy with the current economic landscape. Confirmation of a rate cut would likely bolster sentiment that the tightening cycle has concluded.
Bond markets have already begun to price in the transition to easier conditions. Treasury yields have drifted lower, encouraging investors to extend duration and re-evaluate the returns available across fixed income after an extended period of compression. Lower yields would contribute to a broader easing of financial conditions, offering support to credit markets and refinancing activity.
What does this mean for the USD?
A softer policy stance would have implications for the dollar as well. Reduced yield support would encourage a gradual diversification of global capital flows, particularly toward markets where central banks have greater room to maintain or increase real yield differentials. Emerging economies, many of which have struggled under the weight of a strong dollar and tight global liquidity, stand to benefit from a shift in US policy.
A rate cut next week would reverberate beyond US borders, granting other central banks greater flexibility and helping global investment flows regain momentum. With expectations firming ahead of the meeting, markets are signalling that the economic case for easing has strengthened decisively and that the next phase of the global monetary cycle is approaching.