Christmas 2025: January Fed Rate Cut Odds Sink After Q3 GDP Blowout

While Trump administration officials continue to back lower rates, market expectations point to the Fed taking a pause next month.

• According to data from the CME FedWatch tool, the probability of a 25-basis-point rate cut in January is now 13.3%, down from 24.4% a week ago.
• Similarly, the odds of a 25 bps cut in March fell to 40.7%, from 44.4% a week ago.
• Unlike in the Trump administration, there is less consensus among market experts regarding the Fed’s monetary policy direction in 2026.

The Federal Reserve’s monetary policy direction heading into 2026 is in focus after the unexpectedly strong U.S. Gross Domestic Product (GDP) growth in the third quarter (Q3), bolstered by consumer spending, exports, and government spending.

Following the conclusion of the Federal Open Market Committee’s (FOMC) meeting earlier this month, the central bank penciled just one rate cut in 2026.

What Are The Markets Expecting?

While Trump administration officials continue to back lower rates, market expectations point to the Fed pausing next month. According to data from the CME FedWatch tool, the probability of a 25-basis-point rate cut in January is now down to 13.3%, from 24.4% a week ago. Similarly, the odds of a 25 bps cut in March fell to 40.7%, from 44.4% a week ago.

This follows three consecutive 25-basis-point rate cuts in the September, October, and December FOMC meetings.

Market Experts Divided

Unlike in the Trump administration, there is less consensus among market experts.

Collin Martin, head of fixed income research and strategy at the Schwab Center for Financial Research, stated in a recent note that the strong GDP print could prevent the Fed from cutting rates more than twice next year.

“Strong growth like this should prevent the Fed from cutting much more than one or two times next year and is one more reason that long-term yields should stay elevated,” Martin said.

In contrast, Erik Bregar, director of FX and precious metals risk management at Silver Gold Bull, told Reuters that the Fed may be forced to cave in to calls for rate cuts.

“The market wants cuts. And the odds are that we're going to get a dovish Fed chair that will try to make that happen,” he said, according to the report.

Chris Zaccarelli, chief investment officer at Northlight Asset Management, said inflation could return as a threat, according to a report by The Associated Press. “If the economy keeps producing at this level, then there isn’t as much need to worry about a slowing economy,” he said. 

Who’s Backing Cuts?

From Fed Governor Stephen Miran to Treasury official Joe Lavorgna and President Donald Trump, several voices are calling for further rate cuts next year.

Miran warned earlier this week that if the central bank does not lower policy rates further, there could be a rise in recession risks.

Lavorgna said that if the U.S. economy continues to grow at 3% in 2026 with supply-side gains, that will result in lower inflation. In this light, if the Fed keeps interest rates steady, that will result in a restrictive monetary policy.

“So, the Fed can continue to lower rates. The Fed should lower rates based on its own estimates of where our star is, the neutral rate,” he added.

President Trump stated in a post on Truth Social on Tuesday that he wants the next Fed Chair to lower interest rates if the markets are doing well.

“I want to have a Market the likes of which we haven’t had in many decades, a Market that goes up on good news, and down on bad news, the way it should be, and the way it was,” he said, while adding that inflation will take care of itself.

Meanwhile, U.S. equities gained in Wednesday’s opening trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was up 0.21%, the Invesco QQQ Trust ETF (QQQ) gained 0.09%, while the SPDR Dow Jones Industrial Average ETF Trust (DIA) rose 0.43%. Retail sentiment on Stocktwits regarding the S&P 500 ETF was in the ‘bullish’ territory.

The iShares 7-10 Year Treasury Bond ETF (IEF) was up 0.12% at the time of writing.

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