Fed Funds Futures Signal Growing Expectations of a Pause in January

BY COMFORT OGBONNA

Futures tied to the federal funds rate—an important gauge of the cost of unsecured overnight borrowing between banks—indicated on Wednesday that traders increasingly expect the Federal Reserve to pause its easing cycle at the January policy meeting.

Market pricing showed a 78% likelihood that the Fed will keep interest rates unchanged, up from about 70% just before the central bank announced its latest rate cut.

The Fed’s new projections, released after its 25-basis-point reduction in the benchmark rate, revealed that the median policymaker anticipates just one quarter-percentage-point cut in 2026, mirroring the outlook presented in September. Despite this cautious stance from policymakers, futures markets continued to reflect expectations of two cuts in 2026, implying a target rate near 3.0%. The Fed’s move on Wednesday brought the federal funds rate down to a range of 3.50% to 3.75%.

However, the individual forecasts that shape the Fed’s “dot plot” showed an unusually wide divide. Only four policymakers projected a single rate cut next year, while another four anticipated two cuts, and four others saw the need for even more easing. Even more striking was the fact that six officials signaled they did not support Wednesday’s quarter-point cut at all, instead marking 3.9% as the appropriate year-end rate for 2025 something never before seen in the dot plot’s history.

JP Powers, chief investment officer at RWA Wealth Partners in Boston, noted that while the dot plot is “a poor forecasting tool,” it still provides a window into the Fed’s thinking. He pointed out that the divergence in forecasts underscores the lack of consensus within the central bank. According to Powers, roughly seven officials appear to favor holding rates steady throughout 2026, while eight expect at least two cuts next year a split that highlights the uncertainty surrounding the Fed’s policy path.