Fed decision in Dec 2027?

The market currently prices a 43% probability for a 25bps hike in December 2027, but this appears significantly mispriced relative to the prevailing expert consensus. Major institutions including Goldman Sachs, Morningstar, and Bloomberg’s surveyed economists explicitly forecast rate cuts in June and December 2027, bringing the terminal rate to 3%–3.25%, which contradicts the hike scenario. JPMorgan is the sole source acknowledging a possible 2027 hike, but it specifically targets September 2027, not December, further weakening the case for the event.

The market’s elevated pricing likely stems from a recent hawkish sentiment shift, as noted in Kalshi data showing a surge to 37% odds and derivatives pricing indicating hikes are now seen as more likely than cuts. However, this sentiment appears to overreact to short-term inflation pressures and labor market strength without accounting for the longer-term cooling trend expected in 2027. The CME FedWatch tool’s earlier 51% chance of a hike by March 2027 has not translated into a December-specific hike consensus, and the median economist forecast now points to cuts starting mid-2027.

Key drivers include the inflation trajectory, which is expected to cool by 2027, and slowing economic growth that would pressure the Fed toward easing rather than tightening. The risk of a hike would require inflation to re-accelerate persistently, a scenario not supported by current forecasts. Given the divergence between the market’s 43% and the independent assessment of 18%, the market appears to be mispricing the event by overestimating the likelihood of a December hike.