Fed 'Hawkish Cut' Could Jolt Markets: Should You Hedge Your Portfolio?

A 25-basis-point cut is almost fully priced for the Dec. 10 Federal Reserve meeting, with CME FedWatch data showing nearly a 90% chance for the third straight interest-rate reduction.

Yet, some analysts are warning traders not to get overly excited about the move itself.

Two forces may actually end up driving markets far more than the widely expected rate cut: the Fed's fresh economic projections and Chair Jerome Powell's remarks.

And the underestimated risk points toward a so-called “hawkish cut.”

See Also: Why This Week’s Fed Decision Matters For JPMorgan (JPM) Stock

December Cut Looks Locked In, But Analyst Warns About Hawkish Tilt

According to Peter Williams, analyst at 22V Research, the meeting will likely deliver one more cut before the Fed hits the brakes on easing.

He says Powell will note that "this second set of risk management cuts by the FOMC is likely done for now,” and that the Fed will need more decisive data to shift policy away from its modestly restrictive stance.

Williams expects dissents to track October's lineup, saying Kansas City Fed President Jeffrey Schmid will dissent by voting against a cut and Governor Stephen Miran will dissent dovishly by voting for a 50-basis-point reduction.

He adds that one or more new hawkish dissents are possible, pointing to Boston Fed President Susan Collins, Chicago Fed President Austan Goolsbee and St. Louis Fed President Alberto Musalem after their recent comments that played down the need for more near-term easing.

“There is simply no way for Powell to avoid the disagreements, both formal dissents and the broader bevy of Fedspeak we will get before the holidays.”

Williams says the Summary of Economic Projections should see only somewhat better growth, slightly lower inflation, and roughly unchanged unemployment rate forecasts compared to September.

“The fundamental challenge for Powell in the lead up and in communicating the results of this meeting is that there is very little consensus on the FOMC about the near-term outlook for policy,” Williams says.

The Dot Plot May Drive Markets More Than The Cut

Williams says the doves have already won the debate for another preemptive cut, but he indicates that this phase ends in December.

With rates closer to neutral and the fall's labor-market scare failing to escalate, he says the Fed is pivoting into a slower, meeting-by-meeting mode unless forced to act.

“The dot plot for 2026 will likely show a single cut median,” he ads.

He says eight officials are likely to favor unchanged rates above the 2026 median, and a few may even pencil in a hike.

Should Traders Hedge Fed Risk?

The December meeting may look straightforward on paper, but the market impact won't be. The cut is priced, the pause is forming and the projections are drifting only modestly. What matters now is the widening split inside the Fed and how Powell chooses to navigate it.

The CBOE Volatility Index has slipped back to the same floor that preceded sharp spikes in both October and December last year. Stocks have rallied to familiar resistance and yields have already pushed higher into the meeting.

The S&P 500 ? as tracked by the Vanguard S&P 500 ETF ? trades at less than one percentage point below record highs.

For traders weighing whether to hedge volatility, the setup is tough to ignore.

"The volatility and technical setup now looks very similar to the setup we had back at the end of October before the last Fed decision," said 22V Research quantitative analyst Jeff Jacobson.

He notes that "VIX essentially bottomed right before the Fed meeting and then spiked again in November as stocks came under pressure," and reminds investors that "we have had two moves where the VIX has doubled in short order."

"Now is a time you want to own volatility and/or hedges," he added.

So while traders may cheer a third straight cut, analysts argue the real story is a central bank entering a new phase of disagreement, weaker guidance and far less certainty about what follows.

For markets, that is a source of volatility in itself.

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