Just last October, a significant majority—55%—of traders in Fed Funds futures contracts anticipated a rate cut from the U.S. Federal Reserve this month, projecting the base rate would fall to 3.25%. That sentiment has shifted dramatically. Now, 90% of those same traders believe the Fed will maintain rates at 3.5% when it convenes in just under three weeks, suggesting that another rate reduction is largely off the table in the eyes of Wall Street. This change in outlook appears driven by two principal factors, both of which are seeing new, market-moving data emerge.
The financial markets have adopted a wait-and-see approach, with S&P 500 futures showing little movement this morning after the index closed near its record high yesterday. European and Asian markets, conversely, saw mostly positive activity. All eyes are on forthcoming economic indicators and a pivotal Supreme Court ruling. Donald Trump, for his part, weighed in on Truth Social last night, urging the Supreme Court justices to consider the nation’s economic performance. He stated, “Our Nation’s Gross Domestic Product (GDP) is predicted to come in at over 5% … a direct result of TARIFFS, which have rescued our Economy and National Security. I hope the Supreme Court is aware of these Historic, Country saving achievements prior to the issuance of their most important (ever!) Decision.” While he offered no source for his 5% GDP prediction, Bloomberg’s analyst survey indicates a consensus of 2% growth this year, with Goldman Sachs offering a more optimistic 2.6%.
The potential implications of the Supreme Court’s decision on tariffs are substantial. UBS economist Paul Donovan informed clients that over 70% of tariffs, prior to recent revisions and cancellations, are under consideration. Should these be deemed illegal and trigger rebates, the ruling would effectively act as a fiscal stimulus for the U.S. economy. This would hold true even if new tariffs were to impose fresh fiscal constraints on future trade. Such a development, combined with an improving labor market, would significantly diminish any rationale for the Federal Reserve to introduce further economic stimulus through lower interest rates.
Francesco Pesole of ING suggests that a Fed rate cut is unlikely before March. He emphasizes that the unemployment rate, even more so than payroll figures, will be a key metric for the Fed, given its focus on joblessness. Expectations are for the unemployment rate to decline to 4.5% from 4.6%. If this materializes, coupled with payroll additions of 50,000 to 100,000, it would effectively rule out a January cut and keep the probability of a March cut below 50%. This confluence of factors paints a picture where the economic landscape, particularly the labor market and potential fiscal injections from tariff rebates, could remove any immediate impetus for the Fed to ease monetary policy further.
The market’s current stance reflects this anticipation. With the prospect of a strengthening jobs report and the significant financial impact of potential tariff refunds, the argument for maintaining the current interest rate becomes considerably stronger. Investors and analysts are now closely scrutinizing these data points, understanding that their outcomes will heavily influence the Federal Reserve’s next move and, by extension, the broader economic trajectory. The shift from a predicted rate cut to a likely hold illustrates the sensitivity of market expectations to evolving economic realities and critical legal decisions.
