Odds for December Rate Cut Soar to 71% After Michigan Consumer Sentiment Hits 2nd-Lowest in History

The possibility of Fed rate cut in December has increased sharply. This is because the consumer confidence in the United States has dropped towards the all-time low. Data from the University of Michigan showed that its Consumer Sentiment Index dropped sharply to 50.3 in November, marking its second-lowest reading in history.

Consumer Confidence Falls Below 2008 Recession Levels

According to the Kobeissi Letter, the 3.3-point decline missed expectations of 53.0 and continued a four-month losing streak. The Kobeissi analysts say the fall reflects deepening pessimism about the economy as inflation remains stubborn and job growth slows.

Also, a sharp rise in job cuts has intensified pressure on the Fed to deliver a rate cut, deepening investor caution. The index’s current conditions subindex also plunged 6.3 points to 52.3, the lowest ever recorded. Meanwhile, the expectations gauge slipped to 49.0, its third-lowest level since July 2022.

Statistics reveal that American households are witnessing a grim economic future. According to The Kobeissi Letter, consumer sentiment now sits below levels seen during past recessions, including 2008. This can result in a drop in expenditure which drives more than two-thirds of the U.S. economic activity.

Market Bets on Fed Rate Cut Surge to 71%

The collapse in sentiment has already shifted market expectations for monetary policy. Prediction market platform Kalshi shows a 71% probability that the Fed will cut interest rates by 25 basis points in December.

Only 26% of traders expect the Fed to hold rates steady, while a small 4% see the chance of a larger cut. Based on these odds, the steep fall in household sentiment might push the Fed to reduce rates earlier than anticipated. Fed officials such as Governor Christopher Waller have hinted at a rate cut in December despite Powell’s firmer stance.

Most of them hope that the central bank will focus on making the efforts to avoid unnecessary recession. Based on historical data, the connection between sentiment index and consumption trends suggests that a change of policy has become necessary.

Nonetheless, Fed might continue to wait until additional information on labor and inflation is obtained before taking a decision on rates. While consumer mood has worsened, wage growth and employment remain relatively stable. The December meeting will provide the clearest test of how policymakers balance weakening confidence against still-elevated prices.