Fed Rate Cut In October ‘Pre-Ordained’ But December 'Far From Certain' As Inflation Remains Elevated, Says Schwab

• Schwab analysts pointed to inflation remaining above the central bank’s target of 2%.
• In contrast, analysts at ING stated in a recent note that they expect a 25 basis point cut in December, and a total of 50 basis point cuts in early 2026.
• Jefferies’ Chief Market Strategist, David Zervos, cautioned that the Fed will have to consider the possibility of far fewer jobs being created.

Analysts at Schwab on Tuesday stated that the Federal Reserve cutting interest rate in December is “far from certain,” even as two cuts are widely expected.

In their latest note, Schwab analysts pointed to the Consumer Price Index (CPI) remaining above the central bank’s target of 2%, despite noting that it came in mild. The annual inflation rate stood at 3% in September, according to data from the Bureau of Labor Statistics (BLS), lower than the Wall Street consensus of 3.1%.

Schwab analysts noted that a Fed rate cut this week is “pre-ordained.” According to data from the CME FedWatch tool, there is a 97.8% probability of a 25 basis point rate cut during the October meeting. "It looks like a rate cut by the Fed next week is all but a sure thing," said Kathy Jones, Schwab's chief fixed income strategist.

However, the firm noted that things could turn out differently after October.

Fed’s Ultimate Nightmare

There are growing concerns about the weakness in the labor market. Jefferies’ Chief Market Strategist, David Zervos, cautioned that the Fed will have to consider the possibility of far fewer jobs being created despite the U.S. economy growing at a healthy rate.

However, analysts at Schwab remain concerned about inflation. Even as more than half of Fed officials expect two more rate cuts in 2025, the firm said it’s not a given yet.

“For Fed policy makers, the ultimate nightmare would likely be having to re-adjust rates back up to fight inflation triggered in part by cutting too dramatically. This happened in the 1980s and has become a third rail for the central bank. Institutional memories are long,” the firm said in its note.

Not Everyone Agrees

Analysts at ING stated in a recent note that they expect a 25 basis point cut in December, and a total of 50 basis point cuts in early 2026.

Likewise, Jeremy Siegel, Wharton School professor of Finance and WisdomTree chief economist, expects two 25 basis point cuts in October and December. “I put the odds north of 90% that we get the December cut as well, and I see room for additional quarter-point reductions in early 2026 if the disinflation trend persists,” he said.

Meanwhile, U.S. equities rose in Tuesday’s afternoon trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up 0.44%, the Invesco QQQ Trust ETF (QQQ) gained 0.84%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.83%. Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘bearish’ territory.

The iShares 7-10 Year Treasury Bond ETF (IEF) was up 0.05% at the time of writing.

Also See: Apple, Microsoft Join Nvidia In $4 Trillion Valuation Milestone

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