The Probability of the Fed Holding Interest Rates Steady in January Is 82.8%

The Federal Reserve is widely expected to hold interest rates steady in January, with a probability of 82.8% according to the CME FedWatch tool. The central bank's next policy meeting is scheduled for January 28, and market expectations remain focused on inflation trends and labor market data. Investors are cautiously optimistic about the possibility of rate cuts later in the year but not in the immediate term.

Philadelphia Fed President Anna Paulson has suggested that the Fed may consider rate reductions if inflation continues to moderate. She noted that the current rate target of 3.5% to 3.75% is still slightly restrictive, which means it remains high enough to help contain inflation according to Paulson's comments. Paulson's comments reinforce the broader expectation that a tightening cycle is not expected to resume anytime soon.

Market participants are closely watching the U.S. jobs report for December and the ISM manufacturing and services-sector activity data. These reports will provide critical insights into the health of the economy and the timing of future Fed policy decisions. With the labor market still showing signs of resilience, the case for a rate cut remains under review.

What Are the Odds of a January Rate Cut?

The CME FedWatch tool currently assigns a 14.4% probability of a quarter-point rate cut at the January meeting, with the target rate potentially falling to 325-350. This suggests a high likelihood of rate stability in the short term. The Fed's hesitance to cut rates reflects uncertainty about the pace of inflation cooling and the broader economic outlook.

Standing-repo facility usage has also been a point of interest, with record borrowing levels observed last week. This highlights continued funding pressure in the repo market, particularly at the end of 2025 as the Fed wound down its balance-sheet reduction program. While new reserve-management purchases may ease some of these strains, they are not expected to eliminate them entirely.

Why Is the Fed Considering Rate Cuts Later in the Year?

Anna Paulson has indicated that further rate reductions could occur if inflation continues to decelerate. She expressed cautious optimism that price pressures may ease in the coming months. For now, however, she believes the current rate is still appropriate to maintain monetary restraint. This suggests that the Fed's policy stance will remain cautious until more definitive signs of inflationary moderation emerge.

Market analysts also note that CD rates may continue to decline in early 2026, particularly on the short-end of the yield curve. Some industry experts predict that the yield on 4% CDs today could be seen as favorable in the next 12 months if the Fed continues to cut rates. This aligns with broader expectations of a gradual easing cycle as the Fed seeks to support economic growth while managing inflation risks.

What Economic Indicators Are Influencing the Fed's Decision?

The coming weeks will bring a series of key economic reports that could shape the Fed's decision-making process. The Philadelphia Fed Manufacturing Index and S&P Global Manufacturing PMI for January will be closely watched for signs of economic momentum. In addition, U.S. GDP data for the fourth quarter and consumer price index readings will provide further clarity on inflation trends.

Analysts also highlight the importance of wage growth and employment data. While inflation has shown some signs of easing, wage increases could pose a challenge to further rate cuts. The Fed must balance the need to support economic activity with the risk of persistent inflationary pressures.

As the first full trading week of 2026 begins, investors are bracing for potential market volatility driven by geopolitical developments and economic data releases. The U.S. arrest of Venezuelan President Nicolas Maduro and related geopolitical tensions have also added an element of uncertainty to global markets. These factors underscore the complexity of the current economic environment and the need for the Fed to proceed with caution.

The January Barometer, a historical indicator of market performance, has shown an 84% accuracy rate in predicting the year's direction based on January performance. With the S&P 500 up 2.7% in January 2025, followed by a strong finish to the year, investors are hopeful for a similar outcome in 2026. However, the path forward will depend heavily on the Fed's policy decisions and broader economic conditions.