The Fed's January 2026 Rate Cut Odds: A Tipping Point for Risk Assets?

The Federal Reserve's monetary policy trajectory has long served as a barometer for global financial markets. As 2026 approaches, the evolving odds of a rate cut in January-currently priced at 17.7% by the CME FedWatch tool-have sparked renewed debate about whether this signals a pivotal shift in risk-on sentiment. With equity and crypto markets already pricing in a gradual easing cycle, the question is no longer if the Fed will cut rates, but when and how aggressively these cuts will materialize.

The 17.7% Threshold: A Market-Driven Reassessment

As of December 28, 2025, the probability of a 25-basis-point rate cut at the January 2026 FOMC meeting has risen to 17.7%, according to CME's FedWatch data. This represents a modest but notable increase from earlier in the year, when the market had priced in near-zero odds of a cut before mid-2026. The 17.7% figure reflects growing investor confidence in the Fed's willingness to pivot from its hawkish stance, particularly as inflationary pressures ease and economic growth moderates.

However, the 82.3% probability of a rate hold underscores the Fed's caution. The central bank's December 2025 meeting minutes emphasized a "data-dependent" approach, with policymakers projecting only one 25-basis-point cut in 2026. This contrasts sharply with the futures market, which implies two cuts by year-end, potentially bringing the federal funds rate to 3.0%. The divergence between the Fed's official projections and market expectations highlights a tug-of-war between institutional caution and investor demand for liquidity.

Historical Trends and the Fed's Easing Path

The shift in market sentiment is not abrupt. From November to December 2025, the implied probability of a January rate cut increased from roughly 12% to 17.7%, driven by weaker-than-expected inflation data and a softening labor market. The 30-Day Fed Funds futures market, which trades on the CME, further reinforces this trend, with prices suggesting a target rate of 3.25%-3.50% by mid-2026.

J.P. Morgan Research and Goldman Sachs have both modeled scenarios where the Fed follows the market's lead, with two cuts in 2026-potentially in March and June-to offset lingering inflation risks. This would mark a significant departure from the Fed's December 2025 guidance, which emphasized a "measured" approach to easing. The key question is whether the January 2026 meeting will serve as a catalyst for this shift or merely a pause before more aggressive action later in the year.

Implications for Equities and Crypto Markets

The 17.7% probability of a January rate cut, while still low, has already begun to reshape risk asset dynamics. For equities, the prospect of lower borrowing costs and a shift away from quantitative tightening (QT) has bolstered valuations for growth stocks and large-cap tech. BlackRock analysts note that a Fed pivot could support U.S. equities, particularly in sectors sensitive to interest rate cycles, such as real estate and utilities.

For cryptocurrencies, the implications are even more pronounced. The Fed's December 2025 announcement of a $40 billion monthly liquidity injection via its Reserve Management Purchases (RMP) program-purchasing short-term Treasuries to offset QT-has been hailed as a structural tailwind for crypto markets. Historically, Bitcoin and other digital assets have shown a strong correlation with liquidity conditions, and the end of QT, combined with the potential for rate cuts, could catalyze a new bull market.

Goldman Sachs and J.P. Morgan both highlight that a 25-basis-point cut in January would signal the Fed's acceptance of a "new normal" in inflation and growth, shifting monetary policy from a headwind to a tailwind for risk assets. This is particularly relevant for crypto, where low-interest environments reduce the opportunity cost of holding non-yielding assets.

Is 17.7% a Tipping Point?

The 17.7% probability of a January rate cut is not a binary inflection point but rather a symptom of a broader trend. Markets are pricing in a transition from a hawkish to a dovish regime, with the Fed's January meeting serving as a potential midpoint in this evolution. While the 17.7% figure is modest, it reflects a growing consensus that the Fed will act sooner rather than later to prevent a prolonged tightening cycle from stifling economic growth.

However, investors should remain cautious. The Fed's December 2025 statement included a "hawkish" caveat, emphasizing that any cuts would depend on incoming data. A surprise inflation print or a stronger-than-expected jobs report could delay the first cut until March, limiting the immediate impact on risk assets. That said, the mere expectation of easing-regardless of timing-has already begun to reshape market behavior, with liquidity injections and the RMP program providing a floor for equities and crypto.

Conclusion

The 17.7% probability of a January 2026 rate cut is a modest but meaningful signal of shifting market sentiment. While the Fed remains cautious, the divergence between its projections and market expectations suggests that a more aggressive easing cycle is being priced in for 2026. For equities and crypto, this dynamic creates a favorable backdrop, with liquidity-driven tailwinds outweighing the risks of a delayed first cut. As the January FOMC meeting approaches, investors will be watching for any signs that the Fed is ready to embrace the market's optimism-or double down on its cautious stance.