What happens if the Fed cuts rates before Christmas Eve?

Key takeaways

• The Dec. 9-10 Fed meeting carries unusual weight as markets wait to see whether another rate cut will arrive before Christmas, shaping bonds, stocks and cryptocurrencies.

• After two cuts in 2025, rates are now between 3.75% and 4.00%. A weak labor market and slowing inflation support further easing, but officials remain divided because inflation risks have not completely dissipated.

• The slowdown in the labor market, the decline in inflation and the end of quantitative tightening could justify a further reduction and align with year-end liquidity needs.

• Persistent inflation, gaps in economic data caused by the government shutdown and a divided Fed could push policymakers to keep rates unchanged in December.

When the US Federal Reserve meets on December 9-10 to decide interest rates, it won’t be just a routine meeting. Markets are closely watching the direction policymakers choose. Will the Fed cut rates again before the holidays? A reduction before Christmas could cause waves in bonds, stocks, credit markets and crypto.

This article explains why the Fed’s pre-Christmas meeting is important and outlines the factors that support or oppose a possible rate cut. It also highlights what to watch for in the coming weeks and how a Fed decision could affect crypto and other financial markets.

The context of a rate cut in December

Central banks typically cut rates when inflation slows, economic growth slows, or financial conditions become too tight. In late October, the Federal Reserve cut rates by 25 basis points, setting the federal funds target range between 3.75% and 4.00%, its lowest level since 2022. The move follows another 25 basis point cut in September 2025, making it the Fed’s second rate cut of the year.

The move comes amid clear signs of a slowing labor market. October saw one of the worst monthly layoff numbers in more than two decades, according to several labor market reports, heightening concerns about deteriorating employment conditions. The Fed’s October statement echoed this trend, noting that employment risks had increased even as inflation remained somewhat elevated.

At a press conference, Fed Chairman Jerome Powell stressed that a December rate cut was “not inevitable.” Yet economists at Goldman Sachs still expect a reduction, pointing to clear signs of weakness in the labor market. Fed officials remain divided, with some pointing to inflationary risks and limited room for further easing.

A rate cut in December is possible, but not guaranteed.

Factors supporting a possible rate cut

There are several reasons why the Fed may decide to cut rates:

• Cooling of the labor market: Private sector data shows a slowdown in hiring, an increase in layoffs and a slight increase in unemployment.

• Moderate inflation: Inflation is still above target but continues to fall, giving the Fed more flexibility to ease policy.

• Ending quantitative tightening: The Fed announced that it would stop reducing the size of its balance sheet starting December 1.

• Hours before the holidays: A rate cut would align with year-end liquidity needs and help set expectations for 2026.

Arguments for the Fed to delay action

Several factors suggest that the Fed could delay a rate cut in the near future:

• Sticky inflation: According to the Fed’s latest statement, the inflation rate remains “somewhat elevated.”

• Data void: The U.S. government shutdown delayed key reports on employment and inflation, making it harder to evaluate policies.

• Commission Division: Federal Reserve officials are divided on the path forward, encouraging a more cautious approach.

• Limited room for flexibility: After multiple cuts this year, some analysts say the policy is already close to a neutral level.

Did you know? In March 2020, the Fed lowered interest rates to near zero to respond to the COVID-19 crisis. He lowered rates by a total of 1.5 percentage points at his March 3 and March 15 meetings.

What to watch for before December

These factors are likely to shape the Fed’s next policy decision regarding rate cuts:

• Non-agricultural employment and unemployment: Is the job market continuing to slow?

• Inflation data: Any unexpected rise in inflation will reduce expectations for policy easing.

• Financial conditions and market signals: Are credit spreads widening and overall market liquidity tightening?

• Fed Communications: Differences of opinion within the Federal Open Market Committee (FOMC) could influence the outcome.

• External shocks: Trade developments, geopolitical risks or sudden supply disruptions could change the Fed’s approach.

Did you know? U.S. stocks historically returned about 11% in the 12 months after the Fed began cutting rates.

How a Federal Reserve Cut Could Impact Crypto

Fed rate cuts increase global liquidity and often push investors into riskier assets like crypto in search of higher returns. Bitcoin (BTC) and Ether (ETH) tend to benefit from greater risk appetite and growing institutional inflow. Lower borrowing rates for decentralized finance (DeFi) also encourage more leverage and trading activity. Stablecoins could be used more in payments, although their yield advantage diminishes when rates fall.

However, if a rate cut is interpreted as a signal of recession, cryptocurrencies can experience volatility comparable to stocks. Markets could see an initial boost from easier liquidity, followed by a pullback caused by broader macroeconomic concerns. If global financial conditions ease, the environment could support increased demand for crypto.

Lower borrowing costs make it easier for individuals and institutions to take investment risks, which can drive more interest in digital assets. As more money flows into the industry, crypto companies can create better tools and services, helping the industry connect more easily to the rest of the financial system.

Did you know? When the Fed cuts rates, short-term bond yields typically fall first, creating opportunities for traders who follow the movements of the yield curve.

Consequences of a Fed rate cut on other financial sectors

Here’s a look at the potential effects on major asset classes if the Fed cuts interest rates:

• Bonds and yields: Short-term yields will likely decline as markets adjust their expectations. The yield curve could steepen if long-term yields remain more stable than short-term yields, which can signal confidence in future growth. If this decline is seen as a sign of recession risk, long-term yields could also fall, causing the curve to flatten or even invert.

• US Dollar and World Currencies: A rate cut generally weakens the dollar because interest rate spreads narrow. This often supports emerging markets and commodity exporting countries. If the decline is driven by concerns about economic growth, safe-haven demand could temporarily push the dollar higher.

• Actions: A rate cut before Christmas could spark a rally in U.S. stocks if investors see it as a sign of confidence in a soft landing. A soft landing refers to a slowdown in inflation alongside a stable labor market. If the decline is instead driven by growth concerns, corporate profits could come under pressure and defensive sectors could outperform cyclical sectors.