What will the Federal Reserve do exactly? This question has been a hot topic lately, so let's take a good look at it.

According to the latest data from January 9th, market sentiment is very consistent: at the January meeting, there is an 86.2% probability that the Fed will keep interest rates unchanged, and only a 13.8% chance of a 25 basis point cut. Compared to expectations in December last year, there’s almost no change, indicating that this consensus is really solid.

Why does everyone agree that the Fed won't move this month? Essentially, it’s a dilemma.

On one side, the labor market is cooling down. The unemployment rate has risen from 4.4% in September last year to 4.6% in November, which puts pressure on the Fed to cut rates. Many economists say that as long as unemployment continues to rise, the Fed will have to consider easing policies.

On the other side, inflation is still stubbornly high. The core inflation rate remains above the 2% target. If rates are cut too early or too quickly, inflation could surge back. This is a classic case of “you can't have your cake and eat it too.”

Interestingly, although there will likely be no movement in January, the market remains optimistic about rate cuts in 2026. The question is, how much will they cut? How many times? When? These details are hotly debated.

Based on the mainstream expectations from interest rate futures markets, there will be two rate cuts this year, totaling 50 basis points. The first cut might happen in March (38% probability) or April (45% probability), with the second expected around September.

However, the Fed’s official dot plot is much more conservative. They currently plan only one rate cut by 2026, which is significantly more cautious than market optimism. This divergence also reflects the uncertainty about future policy directions.