Fed expected to pause rate cuts after 3 straight reductions amid uncertainty over jobs, inflation

• Market expectations show 97.2% probability of rates remaining unchanged, up from 82.3% last month, reflecting reduced confidence in near-term cuts
• The Fed has cut rates 175 basis points since September 2024 from a cyclical high of 5.25%-5.5%, after aggressive hikes in 2022-2023 to combat inflation that peaked at 9.1%
• Economists expect approximately 50 basis points of easing through 2026, with the first cut unlikely before June as inflation hovers near 3% and unemployment gradually rises

Summary: Fed Expected to Pause Rate Cuts Amid Economic Uncertainty

The Federal Reserve is widely expected to hold interest rates steady at 3.5%-3.75% when its Federal Open Market Committee (FOMC) concludes its January meeting on Wednesday, marking the first pause after three consecutive 25-basis-point cuts in 2025. The CME FedWatch tool shows a 97.2% probability of rates remaining unchanged.

Key Economic Indicators:

• The Fed's preferred inflation gauge, the Personal Consumption Expenditures (PCE) index, stood at 2.8% in November, above the Fed's 2% target
• Unemployment rose from 4.0% at the start of 2025 to 4.4% in December
• The Fed has cut rates by 175 basis points since September 2024, down from a cyclical high of 5.25%-5.5%
• Consumer Price Index (CPI) peaked at a 40-year high of 9.1% in June 2022

Market Outlook:

Policymakers face competing pressures from both sides of their dual mandate—controlling inflation while supporting employment. December meeting minutes revealed deep division among officials, with some advocating rate cuts to stabilize labor markets while others worried about stalled progress on inflation.

Analysts anticipate limited easing in 2026. EY-Parthenon expects 50 basis points of cuts with the first reduction unlikely before June. Principal Asset Management predicts two cuts to bring rates just below neutral, though timing remains data-dependent.

Key Uncertainty Factors:

• Shifting trade and immigration policies
• Sticky inflation hovering near 3%
• Gradually softening labor market fundamentals

Traders will closely monitor Fed Chair Jerome Powell's post-meeting press conference for signals about the future rate path.