Is the interest rate cut in December really certain? Don't rush to pop the champagne.

Recently, there has been a lot of buzz in the market— the probability of the Fed lowering interest rates by 25 basis points this month has surged to 83%. At first glance, it seems like a done deal, but upon closer inspection, it's not that simple.

**A major reversal is expected within a week, what exactly has happened?**

Just last week, the expectation of interest rate cuts was hovering at less than 40%. How did it suddenly turn into an 80% certainty? Three main things are contributing to this wave:

Let's talk about the employment data first—September's unemployment rate surged to 4.4%, the highest point since 2021. More distressing is that even highly educated groups are starting to struggle to find work. This cooling of the labor market has provided doves with an excellent reason.

Looking at the officials' statements again—big shots like Williams from the New York Fed and Governor Waller have recently come out and said, "Inflation is no longer a big problem." Once this signal was released, the market immediately caught on.

There is also an inertia factor - since the interest rate cut cycle began last September, there have already been four consecutive rounds of operations. The market has long become accustomed to this "risk management style" approach, assuming that it will continue down this path.

**What pitfalls are hidden behind the 83% probability?**

On the surface, it seems very stable, but in reality, there are undercurrents.

The first variable comes from within. Among the twelve members of the Federal Open Market Committee, at least six (including the heads of the Boston and Chicago Fed) are clearly opposed to lowering interest rates. If Powell can't manage the moderates, a 6:6 deadlock is likely to occur—according to the rules, interest rates must remain unchanged in this case. This would be awkward.

The second hidden danger is inflation. The CPI is currently at 3%, which is still a distance away from the 2% target. Tariff policies have driven up the prices of goods, while immigration policies have increased the costs in the service industry. If rates are lowered too early, prices and wages might start to chase each other upwards again, which would be a big problem.

**What really matters is not "whether to lower or not", but "how much to lower"**

To be honest, the market has almost fully priced in a 25 basis point rate cut. What needs to be more cautious now are two unexpected situations:

If interest rates are lowered as planned - US stocks may continue to benefit from AI, but the downside potential for US Treasury yields is actually limited, as expectations have already been reflected in advance.

If there is a sudden halt in the decline - then risk assets are likely to correct by 5%-8%, and the dollar will strengthen in the short term.

I think rather than getting caught up in whether there will be a rate cut this time, it is better to carefully examine how the subsequent policy statements outline the pace of interest rate cuts for next year. That is the key information that will truly impact asset allocation in 2026. The market is so exuberant right now that one should be cautious not to be held hostage by expectations.