January Rate Cut Hopes Dim After Fed's 'Hawkish' Signal
Futures markets now price in less than a one-in-five chance of a January cut, as the central bank's updated projections signal a slower easing path for 2026.
Market expectations for another Federal Reserve interest rate cut in January have collapsed, as traders digest a surprisingly cautious message from the central bank. Following the Fed's latest policy meeting, the probability of a rate reduction in January 2026 has plummeted to below 20%, a dramatic reversal from just a week ago.
The sharp recalibration in market sentiment comes after the Federal Open Market Committee (FOMC) delivered what some analysts are calling a “hawkish cut” on December 10. While the Fed cut its benchmark rate by 25 basis points for the third time this year to a range of 3.50%-3.75%, the move was accompanied by forward guidance that tempered investor enthusiasm for a more aggressive easing cycle.
The primary catalyst for the shift was the Fed's updated Summary of Economic Projections (SEP), particularly the “dot plot,” which maps out policymakers' expectations for future interest rates. The median projection indicated that the committee anticipates only one additional rate cut for all of 2026. This signals a much more gradual path to a neutral rate than many investors had been pricing in.
Derivatives markets, which had been leaning toward a continued string of rate cuts into the new year, moved swiftly to price in the Fed's more patient stance. Data reflecting trades in the futures market suggests a significant unwinding of dovish bets. According to an analysis of the CME FedWatch Tool data, the implied probability of the FOMC enacting another quarter-point cut at its January 2026 meeting is now just 22%.
"The December cut was widely expected, but the Fed's forecast was the real story," commented one analyst. "They are signaling confidence in the current economic outlook and feel no urgency to ease policy further at this moment."
Wall Street economists are now adjusting their own forecasts. While most had factored in the December move, the path forward is less clear. Analysts at J.P. Morgan Global Research are forecasting two more cuts in 2025 followed by one in 2026. Meanwhile, economists at Goldman Sachs see the Fed pausing in January before resuming cuts in March and June, ultimately targeting a lower terminal rate of 3%-3.25%.
The divergence between the Fed’s own projections and the slightly more dovish outlooks from major banks highlights the uncertainty facing investors. The market's focus now shifts to incoming data on inflation and the labor market, which will be critical in determining whether the Fed sticks to its measured pace or is forced to accelerate its easing plans in the coming months.