With uncertainty lingering over how President-elect Donald Trump's policy intentions could affect vital parts of the economy, December no longer looks like a done deal for an interest rate cut. Traders on Monday were pricing in barely a 50% probability that the Federal Reserve will lower its benchmark rate when it convenes Dec. 17-18, according to the CME Group's FedWatch gauge. A few weeks ago, the implied probability was north of 80%, or a virtual shoo-in. What changed? Primarily, it was Trump's victory and the extent to which his policies will stimulate the economy and perhaps goose inflation. The current conditions, and questions over the unknown, has strategists at Charles Schwab calling for the Fed to take a breath next month and wait to see how things unfold. "Uncertainty is, I think, a terribly overused word in our business, but in this moment in time I would say it's at a very high level, because you have everything in play and it can go in many, many different directions," Kathy Jones, Schwab's chief fixed income strategist, said in a podcast last week. "I think that makes the case for the Fed to maybe pause, take a beat, say, 'you know what, we need to just sit back and watch how this plays out.'" For her part, Jones said she will be watching Wednesday's release of minutes from the Fed's November meeting, which took place right after the election, for more clues on policymakers' intentions. Liz Ann Sonders, Jones' counterpart at Schwab on the equity side, agreed, noting how difficult it is for business leaders to separate out the noise from reality. "If you're a business leader and you're trying to plan out, you've got to be in wait and see mode in terms of those policies like immigration and tariffs," Sonders said. "So I think we may be at sort of a stall point in that cyclical activity while businesses wait to see what policy proposals become actual policy." Trump on Friday announced he will nominate hedge fund executive Scott Bessent to be his Treasury secretary. In a recent CNBC interview, Bessent advocated for a gradual implementation of tariffs and insisted that Trump has no desire to stoke inflation. Still, market-based measures of inflation are rising. The 5-year break-even rate is just off its highest level in a year, and Treasury yields are still well above where they were when the Fed started cutting in September. A market rally Monday lost a little bit of its steam as well as investors continued to weigh the prospects for Fed policy. The S & P 500 and Nasdaq Composite gave back roughly 65% to 75% of their early gains by the end of the day. "It is really, really hard to argue the other side of tariffs will slow growth and raise inflation. At the extreme of what has been proposed, they're highly inflationary," Sonders said. "When you look at all that, you'd say, why would the Fed need to move now, particularly with all of the uncertainty about what policy is going to be going forward and how that will affect inflation."
