The market doesn't believe in the January rate cut – and the Fed feels the same

There are just over three weeks left until the US Federal Open Market Committee (FOMC) meeting on 01/28/2026, but the financial markets have almost unanimously agreed on one point: the likelihood of the US Federal Reserve (Fed) continuing to cut interest rates in January is very low. Signals from the interest rate futures markets and prediction platforms all indicate that expectations for rate cuts are rapidly cooling, despite the Fed having implemented a series of aggressive easing in the second half of 2025. Clear Decline in Rate Cut Expectations According to data from CME FedWatch, which is based on federal funds futures prices, the market currently assigns an 83.9% probability that the Fed will keep its policy rate unchanged within the 3.50% – 3.75% range after the January meeting. The chance of a further 25 basis point (0.25%) cut is only 16.1%, while the scenario of rate hikes is almost not mentioned. This cautious stance is also clearly reflected in prediction markets: Polymarket: About 90% of participants bet that the Fed will not change rates in January; only 10% believe in a 0.25% cut.Kalshi: The distribution is nearly identical, with an 88% probability for the “hold steady” scenario. This high consensus indicates that the market no longer believes that the rate cuts of 2025 will continue seamlessly into early 2026. Three Consecutive Rate Cuts in 2025: Enough Speed? It’s important to remember that the Fed cut rates three times in 2025, starting in September, continuing at the end of October, and ending with a cut in December. The December decision brought the policy rate down to its lowest level since 2022, marking a sequence of three consecutive reductions, each of 25 basis points. This is a relatively rapid easing pace by historical standards. Therefore, investors now believe the Fed will pause to assess the cumulative impact of these cuts rather than continue easing immediately. Political Pressure Exists, But Not Enough Politically, pressure for the Fed to continue rate cuts still exists. Donald Trump has repeatedly publicly called for deeper rate reductions to stimulate economic growth and lower borrowing costs. However, the market seems to believe these calls are unlikely to influence the Fed’s decision in January. Fed Chair Jerome Powell and many other officials have repeatedly emphasized a “data-dependent” stance, especially as inflation stabilizes and the labor market signals are mixed but not urgent enough. Internal Fed Dynamics Also Not Fully Aligned Some analyses from the Fed San Francisco suggest that Trump’s trade policies might, contrary to common fears, exert downward pressure on inflation in the medium term. Meanwhile, Fed Governor Stephen Miran has publicly expressed a desire to see total rate cuts of up to 1 percentage point in 2026. Nevertheless, many experts say it’s not accurate to say Powell is “hindering” the easing process. Kathy Bostjancic, Chief Economist at Nationwide, comments: “Chairman Powell has helped coordinate three consecutive 25 basis point cuts. It’s not fair to say he is blocking FOMC’s rate reduction decisions.” Timing and Trading Data Factors History shows that FOMC meetings in January rarely produce major surprises, and traders tend to be cautious when betting against this familiar “rhythm.” Data on volume and positions on CME also reinforce this view. Open interest in contracts linked to the January meeting is heavily focused on the scenario of holding rates steady, indicating institutional investors are preparing for stability rather than change. January Is Not About Action, But Confirmation All signals and messages from the market are quite clear: The Fed may have completed its “rapid action” phase in 2025, and January 2026 is likely just a confirmation period. Confirmation that: Previous rate cuts have been effective or not. Inflation continues to cool down sustainably or not. The economy truly needs additional stimulus immediately or not. What’s most notable now is not whether the Fed will cut rates in January, but how long this pause will last. Many investors still believe a deeper easing cycle is ahead – just not in the very first month of the new year.