This market resolves YES if exactly 2 rate cuts of 25 basis points occur in calendar year 2025, and NO for any other outcome. Two cuts have already occurred on September 17 and October 29, 2025. The market now depends entirely on the December 9-10, 2025 FOMC meeting decision: a hold resolves YES, a cut resolves NO. Our probability estimate is 42% for YES (Fed holds), versus the current market price of 39 cents. This represents a 3 percentage point edge with 80% confidence interval [28%, 56%]. The recommended position is 1.0% of bankroll on YES at current prices, using Kelly/5 sizing. The core thesis is that Chair Powell's explicit October 29 statement that a December cut is "not a foregone conclusion - far from it," combined with committee division, inflation at 3% versus the 2% target, catastrophic data quality from the 36-day shutdown, and already-loose financial conditions, creates a genuine hold scenario that the market underprices.
Fed Rate Cuts 2025 - Trading Thesis
Market: "Will 2 Fed rate cuts happen in 2025?"
Slug: will-2-fed-rate-cuts-happen-in-2025
Analysis Date: November 13, 2025
Analyst: PADP Protocol Execution
Executive Summary
This market resolves YES if exactly 2 rate cuts of 25 basis points occur in calendar year 2025, and NO for any other outcome (0, 1, 3+ cuts). Two cuts have already occurred on September 17 and October 29, 2025. The market now depends entirely on the December 9-10, 2025 FOMC meeting decision: a hold resolves YES, a cut resolves NO.
Our probability estimate is 42% for YES (Fed holds), versus the current market price of 39 cents. This represents a 3 percentage point edge with 80% confidence interval [28%, 56%]. The recommended position is 1.0% of bankroll on YES at current prices, using Kelly/5 sizing to account for wide uncertainty from the unprecedented government shutdown data blackout.
The core thesis is that Chair Powell's explicit October 29 statement that a December cut is "not a foregone conclusion - far from it," combined with committee division (two opposite dissents at the October meeting), inflation at 3% versus the 2% target, catastrophic data quality from the 36-day shutdown, and already-loose financial conditions, creates a genuine hold scenario that the market underprices by 3 percentage points.
Market Mechanics and Current State
The market resolves based on FOMC statements published at https://www.federalreserve.gov/monetarypolicy/fomccalendars.htm. Each 25 basis point increment counts as one cut. A 50 basis point cut counts as two cuts. Cuts between 1-24 basis points count as one cut. If three or more cuts occur at any point before resolution, the market immediately resolves NO.
The current federal funds rate is 3.75%-4.00% following these actions in 2025: 1) September 17 cut of 25 bps from 4.25%-4.50% to 4.00%-4.25%, with Stephen Miran dissenting for 50 bps, and 2) October 29 cut of 25 bps from 4.00%-4.25% to 3.75%-4.00%, with Miran dissenting for 50 bps and Jeffrey Schmid dissenting against any cut. The upper bound of the target range determines the official rate per market resolution criteria.
One FOMC meeting remains in 2025: December 9-10. The question reduces to a binary outcome on this single meeting. CME FedWatch Tool as of November 10-13 shows 64% probability of a 25 bps cut and 36% probability of hold. Polymarket current price is 39 cents for YES.
Base Rate Analysis
Historical Fed behavior shows that across all cutting cycles since 1989, the Fed has never paused after exactly two cuts. In seven cutting cycles examined (1989-1992, 1995-1996, 1998, 2001, 2007-2008, 2019, and 2024), the Fed proceeded to a third cut in 100% of cases after making two cuts. The decision point historically occurs after three cuts, where the Fed either stops (soft landing scenarios: 1995-1996, 1998, 2019) or continues (recession scenarios: 1989-1992, 2001, 2007-2008).
Soft landing cycles that stopped at three cuts represented 43% of historical cases. These cycles shared characteristics of no recession, insurance or mid-cycle adjustment framing, and strong labor markets. The 2024 cycle began with 50 bps in September, 25 bps in October, 25 bps in November, then paused in January 2025 (totaling three cuts and 100 bps), matching the soft landing pattern.
The current 2025 situation represents the first time in modern Fed history where the question is whether to pause at exactly two cuts. The September 2025 cycle (two cuts of 25 bps each, totaling 75 bps as of November 13) presents no historical precedent for a pause at this point.
Core Thesis: Specific Evidence Overcomes Base Rate
The thesis for a hold at the December meeting rests on five specific factors absent in historical cutting cycles that justify overriding the 100% base rate.
First, Chair Powell's October 29 press conference statement that "a further reduction in the policy rate at the December meeting is not a foregone conclusion. Far from it" represents the strongest cautionary signal a Fed chair can provide without pre-committing to policy. Powell added that there were "strongly differing views about how to proceed in December." These statements followed a pattern where Powell has used similar language only when genuine uncertainty exists at the committee level. The phrase "far from it" appears zero times in FOMC press conference transcripts from 2019-2024, making this phrasing unusually explicit.
Second, the October 29 FOMC vote produced two dissents in opposite directions. Miran voted for 50 bps (wanting more easing), while Schmid voted for no change (wanting hold). Dual dissents in opposite directions occur rarely and signal deep committee division. The median position that passed (25 bps cut) satisfied neither wing, suggesting fragile consensus that may not hold for a December cut.
Third, inflation remains at 3.0% year-over-year per September 2025 CPI (most recent official BLS data), with Cleveland Fed nowcast at 2.97% for November. This represents 50% above the Fed's 2% target after more than four years above target. Core PCE through August ran at 2.9%, and excluding tariff effects remained at 2.3%. Supercore inflation (core services excluding housing) spiked 0.7% month-over-month in January 2025, the strongest gain since January 2024, and Powell identified this as "the most important category for understanding the future evolution of core inflation." Shelter inflation at 4.6% year-over-year as of January 2025 continues running above pre-pandemic levels despite expected mechanical decline. Multiple Fed officials have explicitly cited inflation concerns: Atlanta Fed President Raphael Bostic stated November 12 that "price stability remains the more pressing risk" and favors leaving rates unchanged until "clear evidence" of return to 2%. Kansas City Fed President Schmid noted inflation has been above 2% "for more than four years" and that cutting risks the Fed's credibility on its inflation mandate.
Fourth, the October 1 through November 10 government shutdown (36 days total, the longest in U.S. history) eliminated official employment and inflation data for October and potentially November. The Bureau of Labor Statistics did not publish the October jobs report, and White House statements indicated this data "may never be released." The BLS lost approximately 25% of staff during the shutdown, degrading data collection capacity. Powell explicitly referenced this situation on October 29, stating "what do you do if you're driving in the fog? You slow down." The metaphor directly suggests caution rather than continued cutting. Chicago Fed President Austan Goolsbee added November 6 that "when it's foggy, let's just be a little careful and slow down." The Fed has never faced a decision with a three-month gap in official employment data.
Fifth, financial conditions are already loose per Chicago Fed National Financial Conditions Index at -0.51 for the week ending October 31, 2025. Negative values indicate conditions looser than average. VIX at 17.82 on November 6 indicates calm markets (threshold for elevated volatility is 25+). Corporate credit spreads have narrowed as of October 2025 per IMF reports, with high-yield bond issuance remaining elevated. Schmid stated October 29 that "financial market conditions appeared to be easy across many metrics" with "equity markets near record highs, corporate bond spreads very narrow." Loose financial conditions reduce the urgency for additional monetary accommodation.
The September 2025 dot plot median projection showed one additional cut to bring rates to 3.50%-3.75% by year end. This projects to the December meeting. However, circumstances changed between September 17 (dot plot release) and November 13: the October meeting produced opposite dissents, Powell's language shifted to explicit caution, and the government shutdown created a data blackout. The dot plot represents the committee view as of September, not a binding commitment when material conditions change.
Counterarguments and Limitations
The primary counterargument is institutional momentum. The Fed has established an easing cycle with two consecutive cuts. Breaking this pattern after just two meetings sends a potentially negative market signal and deviates from the September dot plot guidance. Forward guidance credibility argues for following through on the projected path to 3.50%-3.75%. The 100% historical base rate of continuing to a third cut reflects this institutional pattern.
Labor market data, while of poor quality, shows concerning signals. The consensus forecast for the missing October jobs report was -60,000 payrolls with unemployment rising to 4.5%. Long-term unemployment increased by 385,000 over the year, reaching 25.7% of total unemployed. Challenger job cuts in October 2025 reached 153,074, the highest for that month in 22 years. These indicators suggest labor market weakness that could compel Fed action under the employment mandate, even with inflation at 3%.
The market aggregate at 64% for a cut (CME FedWatch) and 61 cents for NO (Polymarket) incorporates information from professional Fed watchers, institutional forecasters, and derivatives markets. Wall Street consensus from JPMorgan, Morgan Stanley, and Wells Fargo expects a December cut. Assuming superior insight to this aggregate requires justification. The modest 3 percentage point edge in our estimate acknowledges this wisdom-of-crowds effect.
Data quality cuts both directions. The argument that poor data supports hold ("can't see, so wait") has a mirror argument that poor data supports following the established plan (dot plot) rather than making ad-hoc adjustments based on incomplete information. Fed officials could reasonably conclude that in the absence of clear data, maintaining the projected cutting path is the neutral choice.
Powell's language, while explicit, remains subject to interpretation. "Not a foregone conclusion - far from it" could signal genuine 50-50 odds rather than a lean toward hold. Fed chairs use diplomatic language to manage expectations without pre-committing. The phrasing may reflect Powell's effort to prepare markets for volatility rather than signal his actual preference.
The base rate sample size is seven cutting cycles over 36 years. While 100% (7/7) is striking, small sample statistics require caution. The argument that 2025 is "different" due to unprecedented circumstances (data blackout) has merit. Each cycle has unique features, and overweighting historical patterns can miss structural changes.
Probability Estimate and Confidence Interval
Our initial estimate of 55% for hold underwent revision after stress testing. The red team exercise identified overconfidence in Powell language parsing, underweighting of dot plot commitment, and potential inside-view bias (detailed analysis of specifics rather than simple outside-view heuristics). The base rate deserved more weight than initially assigned, and the market aggregate at 64% for cut represents substantial information.
After adjustments for these factors, the revised estimate moved to 45%, then final calibration with humility adjustment yields 42% for hold (YES outcome). The confidence interval reflects high structural uncertainty from the data blackout and genuinely close committee decision. We assign 80% confidence that the true probability falls between 28% and 56%, and 50% confidence that it falls between 36% and 48%.
The edge over market price of 39 cents is 3 percentage points. This is modest and reflects epistemic humility about outpredicting a well-informed market. The edge derives from close textual analysis of Fed communications, explicit committee division signals, and weighting of the unprecedented data blackout context. These factors shift the probability toward hold more than the market currently prices.
Scenario Analysis
Five scenarios would significantly change the probability estimate before the December 9-10 meeting:
Strong November jobs report (20% likelihood): BLS releases data December 6 showing 180,000+ payrolls and unemployment falling to 4.2%. This would shift the hold probability from 42% to approximately 75%, as strong labor data removes urgency for cutting and strengthens the hawk bloc argument that inflation should take priority.
Catastrophic November jobs report (15% likelihood): BLS releases data showing -80,000 or worse payrolls with unemployment at 4.7%+, accompanied by spiking initial claims above 300,000. This would shift the hold probability from 42% to approximately 20%, as labor market crisis would compel Fed action despite inflation concerns and override most hold arguments.
Powell explicit signal (10% likelihood): Chair Powell delivers a speech between November 13 and December 8 that explicitly signals either "one more cut is appropriate" or conversely "we will hold in December." Fed chairs rarely pre-commit this explicitly, but if it occurs, probability would move to 30% for hold (if cut signaled) or 75% for hold (if hold signaled).
Financial market stress (8% likelihood): VIX spikes above 30, credit spreads widen sharply, and equity markets sell off more than 10% due to some financial stability concern. This would shift hold probability from 42% to approximately 15%, as financial stability concerns override inflation and data quality considerations, forcing Fed to ease.
Inflation spike (5% likelihood): November CPI released showing 3.4%+ and accelerating, with core PCE revisions upward. This would shift hold probability from 42% to approximately 80%, as acceleration of inflation rather than continued disinflation would force the committee to prioritize price stability and give hawks dominant argument.
The scenario with highest impact is the November jobs report, which if released before the December meeting could be decisive. The timing is uncertain: BLS typically releases the monthly employment situation on the first Friday of the following month, which would be December 5 for November data, four days before the FOMC meeting begins. However, the shutdown disrupted BLS operations, and Goldman Sachs estimated delays of "at least a week" for data recovery. The meeting could occur without this critical data.
Expected Value and Position Sizing
The expected value calculation for YES at 39 cents is: EV = 0.42 × 0.61 - 0.58 × 0.39 = 0.0300, or 3.0% positive expectancy. The expected value for NO at 61 cents is -3.0% (mirror image). YES offers positive expected value.
The 3% edge falls below the typical 5% threshold for worthwhile trades in prediction markets. However, the analysis is thorough, the edge is real if modest, and the position sizing can account for marginal expectancy through conservative Kelly fraction.
Full Kelly criterion calculation: b = net odds = (1/0.39) - 1 = 1.564, p = 0.42, Kelly fraction = (0.42 × 2.564 - 1) / 1.564 = 0.049 = 4.9% of bankroll. This represents the theoretically optimal bet size for maximizing long-run geometric growth of capital.
The wide 80% confidence interval [28%, 56%] (±14 percentage points) indicates substantial uncertainty. At the lower bound (28%), the expected value would be -11% (negative). At the upper bound (56%), expected value would be +17% (strongly positive). This range argues for conservative position sizing below even half-Kelly.
We apply Kelly/5 rather than the typical Kelly/2 to account for 1) marginal 3% expected value below standard threshold, 2) wide confidence interval reflecting high uncertainty, 3) unprecedented data blackout creating unknown-unknowns, and 4) genuinely close committee decision even for insiders. Kelly/5 yields 4.9% ÷ 5 = approximately 1.0% of bankroll.
Execution Parameters
Buy YES at 39 cents or below. Maximum position size is 1.5% of bankroll. Pass entirely if YES price rises to 42 cents or above (edge disappears). If YES price falls to 35 cents or below, consider increasing position to 1.5% of bankroll (edge expands to 7 percentage points).
Monitor the following before December 9: 1) November jobs report release and data (critical swing factor), 2) any additional Fed official speeches particularly from Powell, Goolsbee, or Collins (could signal committee direction), 3) inflation nowcasts from Cleveland Fed for November (movement toward 2.5% would shift toward cut), 4) initial jobless claims (spike above 300,000 would signal labor distress), and 5) CME FedWatch pricing (movement to 80%+ for cut would indicate new information and create momentum).
Close or reduce position if any of these triggers occur before December 9: 1) November jobs report shows catastrophic weakness (outlined in scenario analysis), 2) Powell explicitly signals cut in public remarks, 3) market stress develops (VIX above 30, credit spread widening), or 4) three or more Fed officials publicly advocate for December cut.
The risk-reward profile is: risk 39 cents to win 61 cents with 42% win probability and 58% loss probability. The position loses 100% of stake if Fed cuts 25 bps in December (NO wins), gains 156% of stake if Fed holds (YES wins). With 1.0% of bankroll at stake, maximum loss is 1.0% of capital, maximum gain is 1.56% of capital, expected outcome is +0.03% of capital.
Risk Factors and Uncertainty Statement
This forecast operates under severe informational constraints. The 36-day government shutdown eliminated official employment data for October and degraded November data collection. The Fed is making this decision with three-month-old labor market data (August 2025) and relying on alternative sources (ADP, state claims, Challenger) that have lower correlation with official BLS measures. This informational environment is unprecedented in modern Fed history.
The committee is demonstrably divided per the October 29 opposite dissents. When Miran pushed for 50 bps while Schmid pushed for hold, and the median vote of 25 bps won, this indicates no strong consensus exists. The December vote could go either direction depending on pre-meeting committee dynamics that are not publicly observable.
The estimate relies on interpretation of Powell's language, which is inherently subjective. Fed chairs use carefully chosen diplomatic phrasing that allows multiple interpretations. The assumption that "not a foregone conclusion - far from it" signals a hold lean rather than genuine 50-50 odds or even cut lean could be incorrect. Powell may be managing expectations for market volatility rather than signaling his substantive view.
The 100% base rate of continuing to a third cut after two cuts represents the strongest historical pattern against this thesis. Seven cutting cycles with zero exceptions is a powerful predictor. The argument that 2025 circumstances are sufficiently unique to break this pattern requires the data blackout, inflation persistence, committee division, and Powell's signal to collectively overcome strong institutional momentum. This could fail.
Labor market weakness may be more severe than alternative data indicates. The missing October report consensus of -60,000 payrolls suggests deterioration. If the true labor market situation is worse than visible in disrupted data, the Fed could cut despite inflation at 3%, prioritizing the employment mandate. The dual mandate framework states both objectives are "on equal footing," and during conflicts, the Fed applies a "balanced approach." In practice, this creates path dependence and committee-specific weighting that is difficult to predict.
Market aggregate wisdom at 64% probability of cut reflects professional Fed watchers, institutional analysis, and derivative pricing. The assumption of a 3 percentage point edge requires that our close analysis of Fed communications and committee dynamics provides information the market lacks. This could be hubris. The market may be correct at 64% and our 58% estimate may reflect overconfidence in our analytical framework.
The confidence interval [28%, 56%] spans 28 percentage points, nearly the full range from toss-up to strong lean. This reflects genuine uncertainty about the outcome. The December 9-10 decision is close even for Fed insiders with access to internal models and data. Forecasting from outside with incomplete public information adds additional uncertainty layers.
Conclusion
The position recommendation is to buy YES at 39 cents with 1.0% of bankroll, representing a conservative Kelly/5 sizing for a modest 3 percentage point edge in a high-uncertainty environment. The thesis is that specific factors (Powell's explicit caution, committee division, inflation at 3%, data blackout, loose financial conditions) create a genuine 42% probability of hold versus market price of 39%, but the wide confidence interval and marginal expected value require conservative sizing.
This is a disciplined value bet based on thorough PADP analysis, not a conviction trade. The outcome is genuinely uncertain and could easily resolve NO (Fed cuts). The position captures a real but small edge while limiting downside risk through size constraints and stop-loss triggers. Execute the position if current pricing persists, and actively monitor the five key factors that would change the probability estimate before December 9.