The latest futures on the federal funds rate have stirred speculation about the Federal Reserve’s upcoming policy meeting in January. According to reports, there is a 78% chance that the Fed will maintain interest rates at their current level, signaling a potential pause in the easing cycle. This probability has increased from 70% prior to the recent rate cut announcement.
Following the Fed’s 25 basis-point rate reduction, new projections indicate that policymakers anticipate only one quarter-percentage-point cut in 2026, aligning with previous forecasts from September. However, despite this projection, the rate futures market is still pricing in two cuts for 2026, suggesting a fed funds rate of 3.0%. The Fed recently lowered its key rate to a range of 3.50%-3.75%.
Interestingly, only four policymakers have forecasted a single rate cut next year, while another four anticipate two cuts, and an additional four are considering even more cuts. In a surprising turn of events, six policymakers have indicated their lack of support for Wednesday’s rate cut, with a year-end rate of 3.9% for 2025.
Commenting on the situation, JP Powers, chief investment officer at RWA Wealth Partners in Boston, remarked on the unpredictability of the Fed’s projections. He noted, “The dot plot, it’s such a poor forecasting tool and I’ve heard (Fed Chair) Powell say the same thing, but it does give you a lot of insight into how they’re thinking. So it looks like about seven of them are saying we should hold rates steady for all of 2026, and then eight of them are saying let’s cut at least twice next year, so there’s no consensus.”
In conclusion, the uncertainty surrounding future rate cuts and the divergent views among policymakers highlight the complex decision-making process at the Federal Reserve. As the market continues to react to these developments, investors and analysts will closely monitor the Fed’s actions and statements for further insights into the direction of monetary policy.
(Reporting by Gertrude Chavez-Dreyfuss; Additional reporting by Chuck Mikolajczak; Editing by Chris Reese)
