As expected, the FOMC pulled the trigger on a 25 basis point cut today, bringing the Fed Funds target range down to 3.50% - 3.75%.
Looking ahead, the market sees a pause in January followed by a slow grind lower.
Here is the clean breakdown of the implied probabilities:
January 28 meeting
Pricing: -5.5 bps
Implied Probability: 22% chance of a cut.
Powell clearly indicated that the plan is to wait before moving again but the market saw how he said the same thing and folded in December. If the jobs numbers come in weak and CPI slips, they will cut again.
April 29 meeting, the next cut arrives
Pricing: -21.3 bps
Implied Probability: 85% chance of a 25 bps cut.
The dots point to a cut in 2026 and April is when the odds rise significantly. The base case is for a cut here or in June.
July 29: Moving Toward 3.25%
Pricing: -39.8 bps
Implied Probability: 100% chance of 1 cut + 59% chance of a 2nd cut (cumulative from today).
H2 is where it starts to get tricky as the Fed funds curve always prices in some tail risks but there is a clear bias towards a second cut that's full priced late in the year
October 28 - December 09: The Destination
Pricing: -53.3 bps (Oct) / -52.2 bps (Dec)
Implied Probability: 100% chance of 2 full cuts and a 25% chance of a third.
Part of the dovish prices we see further out is based on who will be the next Fed chair. Betting markets have Hassett at about 75% right now and Trump is interviewing candidates this week. The bigger question is how much would a dovish chair be able to sway policy.
