On the Radar: December Rate Cut Odds Plummet as the U.S. Fed and BoC Turn More Cautious

  • First National Financial LP

Three Takeaways

  1. In just over two weeks, markets have slashed the implied probability of a December 25 bp rate cut from about 70% to roughly one-third for the Fed and from 23% to 13% for the BoC.
  2. In Canada, headline CPI has eased to 2.2% but core inflation is still stuck near 3%, which lets the BoC maintain a cautious pause at 2.25% and pushes the likelihood of any further cuts well beyond December.
  3. In the U.S., Wednesday’s Fed minutes and speeches reveal a divided FOMC more concerned about sticky 3% core inflation and missing data than about growth.

In early November 2025, bond traders were positioning for imminent overnight interest rate relief on both sides of the border. After a series of rate reductions in prior months, traders largely expected the U.S. Federal Reserve and the Bank of Canada (BoC) to continue easing at their upcoming December meetings.

On November 3, market-implied odds of a 25-basis-point rate cut in December stood near 70% for the Fed and about 23% for the BoC, reflecting confidence that central banks would deliver more stimulus to counter slowing growth and cooling inflation.

However, just over two weeks later, those odds have plunged. The new odds of a December 25bps cut are roughly one-in-three for the Fed (33%) and barely one-in-eight for the BoC (13%), a dramatic repricing of expectations.

This abrupt shift begs the question: What changed in both Canada and the U.S.?

Canadian Inflation Cools, But Remains Sticky

A key development was Canada’s latest inflation report, which, while mildly encouraging on the surface, underscored persistent underlying price pressures. Data released this week on Monday showed headline inflation easing to 2.2% in October, down from 2.4% in September. Falling gasoline prices and slower food cost increases helped pull the annual Consumer Price Index closer to the BoC’s 2% target. In fact, gasoline was 9.4% cheaper than a year ago, thanks in part to a suspension of the carbon tax, and food inflation cooled to 3.4% (from 4.0% in September). This relief in headline CPI, coupled with mortgage interest costs dipping below 3% annual growth for the first time in three years, signaled that price pressures are no longer intensifying.

However, for the BoC, the crux of the matter is what lies beneath the headline: core inflation. The BoC’s preferred core measures (CPI-median and CPI-trim) remain stuck around 3.0% and have shown only glacial improvement. Underlying inflation has not cooled enough to assure the BoC that 2% is locked in. This goes a long way toward explaining why markets “yawned” at the CPI data – the Canadian dollar barely budged and bond yields remained steady after the release - and why traders lowered the probability of a near-term rate cut.

Last month, Governor Tiff Macklem announced a cut in the policy rate to 2.25% and hinted that the easing cycle was likely done for now, absent a “materially” altered outlook. The CPI report reinforced that stance: inflation is stabilizing, but not plunging, exactly the scenario in which the BoC can “stand pat” at 2.25% for the time being.

U.S. Fed Minutes and Officials Highlight Inflation Worries

South of the border, the story is similar: what began as optimism for a year-end Fed rate cut has been doused by the Federal Reserve's hawkish reality. In late October, the Fed delivered its second consecutive 25 bp cut, bringing the federal funds target range down to 3.75–4.00%. Back then, futures markets were confidently signaling another move in December – by some measures, the probability of a Dec. 10 FOMC cut was hovering around 70% or higher in early November. In fact, one month ago, futures implied a 96% chance of a year-end cut, essentially treating it as a done deal. That confidence has steadily eroded. By mid-November, the odds fell below 50%, and following recent Fed communications, the market is now pricing in only a roughly one-in-three chance of a December cut.

What changed? The short answer: the Fed’s own messaging, coupled with murkier data, turned more cautious. The clearest signal came from the FOMC minutes released on Wednesday, which revealed deep divisions among policymakers and rising concern about inflation’s persistence. Notably, “many participants…had already ruled out a December cut,” citing worries that easing too fast could entrench higher inflation or be misread as abandoning the 2% target commitment.

Several officials opposed the October cut outright, warning that progress toward 2% “had stalled” and cautioning against further reductions until price trends improve. This hawkish tone in the minutes “added to growing doubts” about a next cut, with traders slashing the implied odds of a December rate reduction to about 25%. In Chair Jerome Powell’s words, a December cut is “far from assured,” and he emphasized after the Oct. 29 meeting that it was “not a foregone conclusion” given the uncertainty.

Fed officials have been unusually forthright in recent weeks about their hesitations. Boston Fed President Susan Collins captured the shifting sentiment when she said she’d “be hesitant to ease policy further” absent clear evidence of a weakening labor market, especially with such limited data on inflation due to the government shutdown.

Similarly, Atlanta Fed President Raphael Bostic argued that inflation remained “stubbornly elevated” after nearly five years above 2%, and that the economy was resilient enough not to need another cut yet. In fact, core inflation in the U.S. is still around 3%, and Bostic noted that many firms still plan to raise prices, suggesting price pressures “may not cool anytime soon.”

For now, the majority at the Fed appears more concerned about letting inflation fester and prefers to pause and gather clarity.

A one-line summary of Wednesday’s Fed minutes could be written like this: The FOMC remains far more divided than usual on the next steps for policy, and in this highly uncertain environment, caution will be reinforced.

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