Market Expects Fed to Hold Rates in January, Options Market Increases Bet on Fed Standing Pat All Year

The Federal Reserve is expected to keep interest rates unchanged at its January 2026 policy meeting. According to the CME FedWatch tool, traders are pricing in a 95% probability of no rate cuts in January. This follows the central bank's decision to hold rates steady after three cuts in late 2025.

Market anticipation of future easing remains high despite the current hold. Morgan Stanley and Citigroup both forecast that the Fed will deliver at least 50 bps in rate cuts in 2026. Morgan Stanley shifted its timing to June and September, while Citigroup now anticipates cuts in March, July, and September.

JPMorgan, however, has taken a more cautious stance. The bank believes the Fed will maintain the current rate range of 3.5–3.75% throughout 2026 unless there are significant changes in the labor market or inflation. This view contrasts with market expectations that at least two rate cuts will occur before year-end.

Why Did This Happen?

The divergence among banks reflects uncertainty in the economic outlook. President Donald Trump's expected appointment of a new Fed Chair is influencing the debate. Analysts believe this will lead to a more dovish approach, especially with Trump's emphasis on fiscal stimulus and economic growth.

Inflation is a key factor. The December CPI report showed headline inflation at 2.7%, matching expectations, while core CPI came in slightly lower. This has eased concerns about Trump's tariff policies and reinforced the case for rate cuts in the coming months.

How Did Markets React?

Bitcoin surged past $92,000 after the CPI data was released. The rally was fueled by expectations of lower interest rates, which benefit risk assets. The cryptocurrency's performance was also driven by U.S. trading session activity, where it gained nearly 8% in a single day.

The U.S. Dollar Index (DXY) fell slightly to 98.90, reflecting a broader risk-on environment. This aligns with Wall Street's view that lower rates will support equity markets and high-yield assets.

What Are Analysts Watching Next?

Analysts are closely monitoring the labor market for signs of weakness. JPMorgan noted that a tightening labor market could delay rate cuts until the second half of 2026. Morgan Stanley and Citigroup have both adjusted their timelines based on current economic data.

The political landscape also plays a role. Tensions between the Trump administration and outgoing Fed Chair Jerome Powell have created uncertainty. Powell has reportedly faced pressure to lower rates more quickly, but his successor is likely to follow a data-dependent approach.

Investors are also watching for further fiscal stimulus. The Trump administration has announced $200 billion in housing market injections, which could further boost liquidity and asset prices.

The options market is increasingly pricing in a full year of Fed inaction, which contrasts with the forecasts of multiple rate cuts from some Wall Street banks. This divergence highlights the uncertainty surrounding the Fed's path forward.