How Fed’s 2025 Pivot, QT Exit, And Rising Dissent Reshaped Rate Expectations This Year

• According to data from the CME FedWatch tool, the probability of a 25-basis-point rate cut in January is now at 14.9%, down from 23% a month ago. 
• The probability for a 25 bps cut in March remains relatively high, at 42.5%, compared to 38.5% a month ago.
• According to the Fed’s dot-plot projections, the median estimate for the federal funds rate at the end of 2026 is 3.4%, which is a quarter point lower than the current range of 3.5% and 3.75%.

As 2025 draws to a close, investors are trying to decode where the Federal Reserve’s monetary policy is headed next.

After holding rates steady for most of 2025 and resisting President Donald Trump’s calls for rate cuts, the central bank ended the year with three consecutive 25 basis point reductions in the policy rate.

With the labor market cooling and inflation remaining above the Fed’s long-term target of 2%, markets are lowering their expectations of aggressive cuts in the coming year.

What Are Markets Considering?

According to data from the CME FedWatch tool, the probability of a 25-basis-point rate cut in January is now at 14.9%, down from 23% a month ago. 

The probability for a 25 bps cut in March remains relatively high, at 42.5%, compared to 38.5% a month ago.

However, the odds of the federal funds rate being in the 3% to 3.25% range, which implies a cumulative reduction of 50 bps, are considerably low, at 5.9%. This is down from 8.1% a month ago.

Economist’s Take

Jeremy Siegel, professor emeritus of finance at the University of Pennsylvania’s Wharton School of Business, stated last week that cooling inflation gives the Federal Reserve more room to move the policy rate down further. Eventually, he expects additional easing that will take rates closer to the low-3% range.

According to the Fed’s dot-plot projections, the median estimate for the federal funds rate at the end of 2026 is 3.4%, which is a quarter point lower than the current range of 3.5% and 3.75%. This points to just one cut in 2026.

Fed’s Pivot

The Federal Open Market Committee (FOMC) met eight times in 2025 and chose to keep rates unchanged in the first five meetings.

The central bank noted in its first five meetings that the labor market conditions were “solid,” but changed its tone in the sixth meeting in September, with the FOMC statement stating that “job gains have slowed this year” in the last three meetings of the year. However, its tone on inflation was consistent throughout the year, with the central bank stating that it remained “somewhat elevated.”

Inflation remained above the Fed’s long-term target of 2%, and the central bank expects it to stay above this level throughout 2026 as well as 2027.

The Fed also ended its Quantitative Tightening (QT) program on December 1, bringing an end to a multi-year effort to reduce its balance sheet.

Growing Dissent

Dissent among central bank officials has been growing. The first four FOMC meetings saw unanimous agreement among the committee's voting members on the rate policy, but since the fifth meeting, there has been dissent.

Notable among the dissenters this year is Fed Governor Stephen Miran, who has voted for a 50 bps cut thrice since being sworn in to the position in September.

During the December FOMC meeting, there were three dissenters against the central bank’s monetary policy action — while Miran wanted a larger 50 bps cut, Austan Goolsbee and Jeffrey Schmid wanted no cuts.

According to a CNBC report, this is the most divisive the Fed has been in the past six years.

Leadership Change Ahead

Fed Chair Jerome Powell’s term is set to expire in May 2026. President Trump told reporters on Tuesday that he plans to announce his pick for the Fed Chair position sometime in January, after threatening to sue Powell for “gross incompetence,” according to Reuters.

There are two frontrunners for the Fed Chair role — White House National Economic Council Director Kevin Hassett and former Fed Governor Kevin Warsh, with Christopher Waller also in the running.

Meanwhile, U.S. equities declined in Wednesday morning’s trade. At the time of writing, the SPDR S&P 500 ETF (SPY), which tracks the S&P 500 index, was down 0.35%; the Invesco QQQ Trust ETF (QQQ) fell 0.38%; and the SPDR Dow Jones Industrial Average ETF Trust (DIA) declined 0.35%. Retail sentiment around the S&P 500 ETF on Stocktwits was in the ‘neutral’ territory.

The iShares 20+ Year Treasury Bond ETF (TLT) was down 0.18% at the time of writing, while the iShares 7-10 Year Treasury Bond ETF (IEF) fell 0.1%.

Also See: Why Is INBS Stock Rising Today?

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