CME FedWatch Tool Shows 86% Probability Fed Pauses Rate Cuts at January FOMC Meeting

The CME FedWatch Tool indicates an 86% probability that the Federal Reserve will pause interest rate cuts at its next Federal Open Market Committee (FOMC) meeting scheduled for January 2025, signaling a shift in market expectations for monetary policy. The high probability of a pause suggests investors anticipate the Fed will maintain current rates rather than continue the cutting cycle, reflecting evolving economic conditions and policy considerations.

CME FedWatch Tool Methodology

The CME FedWatch Tool derives interest rate probabilities from federal funds futures contracts traded on the Chicago Mercantile Exchange. These derivatives allow market participants to hedge or speculate on future Fed policy decisions, with pricing reflecting collective market expectations about monetary policy outcomes.

The tool calculates implied probabilities for different rate scenarios at upcoming FOMC meetings by analyzing the pricing of 30-day federal funds futures contracts. When traders believe rate cuts are likely, futures prices adjust accordingly. When expectations shift toward holds or hikes, pricing changes reflect these new views.

The 86% probability for a pause indicates that based on current futures pricing, markets assign overwhelming likelihood to the Fed maintaining its current federal funds rate target at the January meeting. The remaining 14% probability presumably splits between scenarios of continued cuts or potentially rate increases, though cuts would be more probable given recent policy trajectory.

These market-implied probabilities don't represent Fed commitments or even official forecasts. They reflect aggregated expectations of market participants who trade based on economic data, Fed communications, and their own analysis. However, Fed officials monitor these probabilities as indicators of market understanding and communication effectiveness.

The probabilities fluctuate continuously as new economic data releases, Fed speeches, geopolitical events, and other information arrives. Significant shifts in FedWatch probabilities can occur following employment reports, inflation data, GDP releases, or FOMC member comments that alter rate expectations.

Context for the Anticipated Pause

Understanding why markets assign 86% probability to a January pause requires examining the Fed's recent policy trajectory and current economic conditions as of late December 2025.

The Federal Reserve began cutting interest rates from their peak of 5.25-5.50% reached in July 2023, responding to moderating inflation and concerns about economic growth sustainability. The cutting cycle's pace and magnitude depended on inflation's path toward the 2% target, labor market resilience, and growth dynamics.

By late 2025, the Fed likely has implemented multiple rate cuts totaling 75-150 basis points from the peak, bringing rates to a range potentially between 3.75-4.75%. The specific level depends on actual economic conditions and policy decisions throughout 2024 and 2025.

The anticipated pause suggests markets believe the Fed has cut rates sufficiently given current economic conditions. Several factors could drive this assessment including inflation proving stickier than expected, requiring caution about additional easing; economic growth remaining resilient, reducing urgency for continued cuts; labor markets staying tight, limiting downside risks; or financial conditions already being sufficiently accommodative.

Recent economic data releases in December 2025 likely influenced the 86% pause probability. Strong employment reports, higher-than-expected inflation readings, robust GDP growth, or elevated asset prices could all contribute to expectations that the Fed will hold rates steady to assess cumulative policy effects.

Fed communications also shape market expectations. If Chair Jerome Powell or other FOMC members recently signaled caution about further cuts, referenced data dependence, or emphasized the need to observe policy effects, markets would adjust pause probabilities accordingly.

Economic Data Considerations

The Fed's decision-making centers on comprehensive economic data across multiple dimensions. Current readings and trends in key indicators determine whether pausing or continuing rate cuts aligns with the dual mandate of maximum employment and price stability.

Inflation dynamics represent the primary policy consideration. Core PCE inflation—the Fed's preferred measure—needs sustainable progress toward 2% to justify continued accommodation. If recent readings show inflation plateauing above target or reaccelerating, the Fed would likely pause to avoid reigniting price pressures.

The labor market's strength influences rate decisions. Unemployment rates, job creation, wage growth, and labor force participation paint a picture of employment conditions. A tight labor market with strong hiring and rising wages might argue against aggressive rate cuts despite previous progress on inflation.

Economic growth sustainability affects policy appropriate for current conditions. GDP growth, consumer spending, business investment, and manufacturing activity indicate whether the economy needs additional monetary stimulus or can sustain expansion at current rate levels.

Financial conditions encompass broader market factors including equity valuations, credit spreads, lending standards, and dollar strength. If financial conditions are already loose due to previous rate cuts and market optimism, additional easing might be unnecessary or counterproductive.

Housing market indicators including home prices, sales volumes, mortgage applications, and construction activity provide sector-specific insights. The housing market's interest rate sensitivity makes it an important transmission channel for monetary policy effects.

Implications of a January Pause

If the Fed pauses rate cuts in January as markets anticipate, several implications follow for monetary policy trajectory, economic conditions, and financial markets.

A pause signals the Fed believes monetary policy has reached an appropriately accommodative stance given current conditions. Rather than committing to continued easing on a predetermined path, the Fed would be data-dependent, adjusting policy as economic conditions evolve.

The pause likely wouldn't represent the end of the rate cutting cycle permanently. The Fed might resume cuts at subsequent meetings if economic conditions warrant, or maintain the pause for extended periods if the economy performs well at current rates. Future decisions depend on incoming data rather than predetermined schedules.

Market reaction to a January pause depends on whether it's fully anticipated. With 86% probability already priced, the actual decision to pause would likely generate muted market response. However, the Fed's accompanying statement, economic projections, and Chair Powell's press conference would significantly influence market interpretation.

Forward guidance becomes crucial during a pause. The Fed must communicate whether the pause represents a temporary assessment period, a potential terminal point for cuts, or a precursor to policy reversal. Ambiguous communications could trigger market volatility as participants debate policy trajectory.

The decision's economic effects would be limited in the immediate term since markets already anticipate the pause. However, if the pause extends for multiple meetings or suggests a higher terminal rate than markets expect, interest-sensitive sectors including housing, autos, and business investment could feel pressure.

Comparison to Fed's Own Projections

FOMC members provide quarterly economic projections including their individual forecasts for appropriate monetary policy paths shown in the "dot plot." Comparing market expectations to Fed projections reveals alignment or divergence in policy views.

If the Fed's December 2024 projections indicated plans for continued rate cuts through early 2025, the anticipated January pause would represent a hawkish shift from previous guidance. This divergence might reflect better-than-expected economic performance, higher inflation, or changed risk assessments since December projections.

Alternatively, if Fed projections already suggested slowing or pausing cuts in early 2025, market expectations align with official guidance. In this scenario, the 86% pause probability simply reflects markets understanding and believing the Fed's communicated policy intentions.

Individual FOMC members hold diverse views on appropriate policy, creating dispersion in dot plot projections. Some members favor maintaining restrictive policy longer to ensure inflation control, while others emphasize downside risks to employment and growth. The median projection provides the most commonly cited summary, though voting members' specific views matter most for actual decisions.

Fed credibility depends on reasonable alignment between projections and actual policy. Large divergences suggest either poor Fed forecasting or insufficient commitment to announced plans. The central bank aims to avoid surprising markets unnecessarily, though data-dependent policy requires flexibility when conditions change.

Dissenting Views and Alternative Scenarios

While markets assign 86% probability to a pause, the remaining 14% reflects alternative scenarios that some market participants consider plausible, even if less likely.

A small probability exists for a 25 basis point rate cut if economic data weakens significantly before the January meeting or if the Fed wishes to provide additional insurance against downside risks. Weaker employment reports, sharply falling consumer confidence, or financial market stress could prompt continued easing despite baseline expectations for a pause.

An even smaller probability likely exists for a rate increase, which would represent a dramatic policy shift. Rate hikes would only occur if inflation reaccelerated sharply or financial imbalances emerged requiring immediate tightening. This scenario appears unlikely given recent policy trajectory and economic conditions.

Some analysts argue the Fed should cut rates more aggressively than markets expect, emphasizing downside risks to growth, potential recession indicators, or international economic weakness. This dovish perspective sees the anticipated pause as prematurely ending necessary accommodation.

Conversely, hawkish analysts believe the Fed has already cut too much given sticky inflation and strong economic growth. This view holds that the pause should extend indefinitely or even reverse if inflation persists above target. These analysts worry about risking credibility by easing before achieving the 2% inflation target sustainably.

The 86% probability reflects consensus expectations, but significant uncertainty remains about economic trajectory and appropriate policy responses. Unexpected developments could rapidly shift probabilities as futures markets reprice based on new information.

Recent Fed Communications

Federal Reserve officials' public comments in December 2025 likely contributed to the 86% pause probability as markets interpreted their statements about policy appropriate for current conditions.

Chair Jerome Powell's recent speeches presumably emphasized data dependence, the need to observe cumulative policy effects, and balanced risks between inflation and employment. If Powell suggested the Fed would move cautiously or assess conditions before additional cuts, markets would increase pause probabilities accordingly.

Other FOMC members' comments provide additional signals about policy inclination. Regional Fed presidents and Board governors speak regularly about economic conditions and policy views. A preponderance of cautious or hawkish commentary would reinforce pause expectations.

The Fed's communications strategy aims to prepare markets for policy decisions without creating undue volatility or confusion. Effective forward guidance allows markets to anticipate decisions, reducing surprise and enabling smoother financial condition adjustments.

However, the Fed must balance transparency with flexibility. Over-committing to specific policy paths constrains responsiveness to changing conditions. The central bank prefers maintaining optionality while providing sufficient guidance for market planning.

Recent communications likely emphasized that policy remains data-dependent rather than on a predetermined path. This messaging allows the Fed to pause, continue cutting, or even reverse course based on economic conditions without contradicting previous guidance.

Market Pricing and Trading Implications

The 86% pause probability already incorporated into federal funds futures pricing means markets have largely adjusted to this expectation. However, trading opportunities and risks remain around this baseline scenario.

Traders might position for volatility around the actual FOMC announcement and subsequent communications. Even if the policy decision aligns with expectations, the statement language, economic projections, or press conference comments could surprise markets and trigger price movements.

Interest rate derivatives including futures, options, and swaps provide mechanisms for expressing views about policy trajectory beyond the January meeting. Traders might position for pause duration, eventual resumption of cuts, or rate path through 2026.

Fixed income markets price based on expected rate paths. Treasury yields, corporate bond spreads, and mortgage rates reflect anticipated Fed policy. If the January pause proves temporary with resumed cuts expected later, longer-term rates might remain relatively low. If the pause suggests higher terminal rates, longer yields could rise.

Equity markets often react positively to rate cuts and negatively to pauses or hikes, though the relationship depends on economic context. A pause driven by strong growth might support stocks, while a pause due to stubborn inflation could create concerns about reduced accommodation.

Currency markets factor Fed policy into dollar valuations relative to other currencies. If other major central banks continue easing while the Fed pauses, the dollar might strengthen. Conversely, if the pause proves temporary, dollar impacts would be muted.

Historical Context and Precedents

Federal Reserve pauses during rate cutting cycles provide historical context for interpreting the anticipated January decision and its implications for subsequent policy evolution.

The Fed frequently pauses during both hiking and cutting cycles to assess cumulative policy effects and evaluate economic conditions before proceeding. These assessment periods allow observation of lagged monetary policy impacts on the real economy.

During the 2019 rate cutting cycle, the Fed implemented three 25 basis point cuts (July, September, October) before pausing as economic conditions stabilized. This precedent shows cuts can end relatively quickly when policy reaches an appropriate stance.

The pandemic-era response saw the Fed cut rates to zero in March 2020 and maintain that level for extended periods while implementing quantitative easing. This extreme accommodation responded to unprecedented economic shock rather than gradual cycle management.

Historical rate cycles show varied patterns. Some pauses represent temporary assessments before resumed cuts or hikes. Others mark cycle endpoints where rates remain steady for extended periods. Distinguishing between these scenarios in real-time remains challenging.

The Fed's policy framework evolution affects pause interpretation. The 2020 adoption of flexible average inflation targeting allows some inflation overshoot after periods below target, potentially making the Fed more patient with elevated inflation readings than under previous frameworks.

International Central Bank Comparisons

Other major central banks' policy trajectories provide context for Fed decisions and global monetary policy coordination or divergence.

The European Central Bank began cutting rates in 2024 after maintaining restrictive policy to combat inflation. The ECB's pace and endpoint for rate cuts depend on eurozone growth weakness and inflation dynamics, which differ from U.S. conditions.

The Bank of England similarly started cutting from peak rates as UK inflation moderated, though persistent inflation pressures and weak growth create challenging tradeoffs. The BoE's policy path may diverge from the Fed's based on distinct economic conditions.

The Bank of Japan maintained ultra-loose policy for decades but began normalizing in 2024 as inflation finally emerged. Japan's policy trajectory runs opposite to other major central banks, with gradual tightening replacing long-standing accommodation.

Emerging market central banks face unique considerations including currency stability, capital flows, and inflation vulnerabilities. Many maintain higher policy rates than developed markets and adjust based on both domestic conditions and major central bank policies affecting global financial conditions.

Policy divergence across central banks creates currency volatility, capital flow shifts, and international financial condition variation. If the Fed pauses while other banks continue easing, relative policy stances affect exchange rates and cross-border investment flows.