As the Federal Reserve's first interest rate decision of 2026 approaches on January 28, market expectations are heavily leaning toward a pause. According to data from prediction market platform Polymarket, the probability of the Fed holding interest rates unchanged stands at an overwhelming 85%. A 25 basis point rate cut is priced at just 15%, while more aggressive cuts of 50 basis points or greater remain at a very low 1%. The market has almost entirely ruled out the possibility of a rate increase, assigning it a probability of less than 1%.
The decision will be finalized following the Federal Open Market Committee (FOMC) meeting scheduled for January 27-28, 2026. The assessment comes amid mixed economic signals. The latest US GDP report showed the economy grew at a stronger-than-expected 4.3% in the third quarter, well above forecasts of 3.2%. This resilience in consumer spending and services would typically argue against further rate cuts.
However, this strength is being weighed against a softening labor market, a key part of the Fed's dual mandate. The unemployment rate climbed to 4.6% in November 2025, marking its highest level in four years. Experts suggest that economic strength alone may not prevent a cut, emphasizing that labor market trends remain central to policy decisions. If hiring continues to slow and inflation remains contained, the central bank may still justify easing to prevent further employment deterioration.
In a recent speech at the Yale CEO Summit on December 16, Fed Governor Christopher Waller highlighted concerns about income distribution, noting that while conditions are favorable for retailers and companies targeting high-income brackets, the lower half of the population is being severely affected by the economic situation. Waller stated the Fed's priority is to strengthen the labor market and support economic growth, balancing job security and wage increases over time.
Analysts are divided on the path forward. Chris Rupkey, chief economist at FWDBONDS, believes political and institutional pressures could lead to Fed rates falling "much faster to neutral in 2026." Conversely, Michael Pearce of Oxford Economics expects the central bank to "remain in the wait-and-see mode for a bit longer." Interestingly, some analysts suggest US stocks could retain strength even if the Fed holds rates, supported by tailwinds like artificial intelligence (AI) and resilient corporate earnings heading into 2026.
