Traders betting big on aggressive Federal Reserve interest rate cuts in 2025 might be in for a brutal reality check as soon as next week.

At the upcoming Federal Reserve meeting on Dec. 18, policymakers are expected to signal a more cautious approach, with only three interest rate cuts projected for next year.

The insight came from a Bloomberg survey of economists which showed the Fed’s median “dot plot” is likely to forecast a federal funds rate range of 3.5%-3.75% by December 2025, reflecting just three rate cuts.

But traders are betting on a much bolder move.

Data from CFTC-regulated Kalshi, a betting platform, reveals that speculators assign a 93% probability of four rate cuts in 2025, with just a 6% chance of the Fed sticking to three cuts.

The wide gap between market sentiment and the Fed's likely stance could spark market turbulence if central bank projections fail to meet investors' dovish expectations.

Latest Fed Comments Signal Slower Approach

Recent remarks from Federal Open Market Committee (FOMC) members suggest that caution is the prevailing theme as the Fed balances inflation risks with a resilient economy.

Here’s a breakdown of their latest statements in December:

Chair Jerome Powell has indicated that the Fed “can afford to be a little more cautious” in moving policy toward a neutral stance, given the robust strength of the economy.

Cleveland Fed President Beth Hammack said the economy's healthy labor market and still-elevated inflation support maintaining a modestly restrictive stance for some time and signaled the Fed is nearing a point where slowing the pace of reductions makes sense.

New York Fed President John Williams said that a gradual move toward neutral policy settings will be appropriate, emphasizing that future decisions will hinge on data and be made on a meeting-by-meeting basis.

Governor Christopher Waller hinted that the Committee might skip rate cuts altogether in some meetings if current forecasts for the end-of-2025 target range are accurate.

Chicago Fed President Austan Goolsbee indicated that upcoming meetings will likely feature close calls between small rate cuts or none at all.

Governor Adriana Kugler and vice chair Philip Jefferson both reinforced the Fed’s data-driven approach, emphasizing the need to carefully evaluate incoming information and the evolving balance of risks.

St. Louis Fed President Alberto Musalem: Echoed the need for caution, suggesting that pausing rate cuts could be appropriate to fully assess the economic environment.

Bank of America Calibrated On Three Cuts, Goldman Sachs Sticks To Four

Bank of America seems to firmly stand in the cautious camp, aligning its forecast with the Fed’s expected dot plot of three rate cuts next year.

The bank's economist Aditya Bhave anticipates the first cut of 25 basis points in December, followed by a pause in January, signaling a slowdown in the pace of easing.

“We think the macro forecasts will indicate slightly stronger inflation next year, and higher longer run growth,” Bhave said.

On the other hand, Goldman Sachs remains optimistic, sticking to its projection of four 25-basis-point cuts in 2025.

The firm envisions a steady pace, with consecutive reductions in December, January, and March, followed by additional trims in June and September. Yet, even Goldman has tempered its enthusiasm somewhat, warning that recent Fed remarks increase the risk of a pause sooner than expected, possibly in early 2025.

What Traders Should Watch

The Fed's updated dot plot, macroeconomic projections, and Powell's post-meeting press conference will be crucial for market participants.

Any hint of fewer or delayed cuts could send Treasury yields higher and hit rate-sensitive assets like stocks.

The S&P 500 Index – as tracked by the SPDR S&P 500 ETF ( SPY ) – is poised to mark a slightly negative weekly performance as of Friday morning trading in New York, snapping three straight weeks of gains.

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