My Wall Street career kicked off nearly 30 years ago, and I’ve navigated the markets through, by my count, almost 225 Federal Reserve interest rate decisions. I learned long ago, through mentors, books, and real-world experience, that the friendlier the Fed, the better it is for investors.
The Fed, which meets about every eight weeks to set interest rates, doesn’t directly control how much banks charge borrowers, but its decisions do indirectly impact how much businesses and everyday Americans pay in interest on everything from credit cards to mortgages to factory floor and data center upgrades.
Effective Federal Funds Rate (June-December 2025):
- December: 3.64%, according to the New York Federal Reserve.
- November: 3.88%
- October: 4.09%
- September: 4.22%
- August: 4.33%
- July: 4.33%
- June: 4.33%
Source: St. Louis Federal Reserve.
The lower the Fed Funds Rate—the rate at which banks charge each other for overnight reserves—the lower Treasury yields, lending rates, and interest expenses, fueling economic activity and corporate profits.
The Fed’s ability to make companies more (or less) profitable with its rate decisions makes its monetary policy incredibly important. As a result, all eyes are on what could happen to rates at the Fed’s next meeting on January 28, 2026.
The Federal Reserve cut rates by 0.75% in 2025, but the outlook for more rate reductions in 2026 is murky.
Chip Somodevilla/Getty Images.
2025 was a tale of two Feds
Federal Reserve Chairman Jerome Powell cut interest rates three times into the end of 2024, leading many to believe that more rate cuts would happen in early 2025.
Instead, Powell decisively shifted to the sidelines, worried that further rate cuts would fan inflationary fires, even as President Donald Trump’s newly announced (and harsher than predicted) tariffs took effect.
The Fed’s rate decisions are made based on a dual mandate:
- Low unemployment
- Low inflation
Unfortunately, those goals often contradict each other. Higher rates lower inflation but cause unemployment to climb, while lower rates increase inflation and lower unemployment. The twin goals have been at major odds in 2025, given inflation has increased since April, before most tariffs were enacted, and unemployment has risen.
In April, inflation was running at just 2.3%. By September, the Consumer Price Index (CPI) inflation rate had risen to 3%, before retreating to 2.7% in October, partially due to incomplete data collection caused by the shutdown in D.C. that occurred that fall.
More Federal Reserve:
- Cooling jobs report resets Fed interest-rate cut bet
- Fed faces 2026 upheaval as economy shifts, Powell exits
- Fed official forecasts bold path for interest rates, GDP in 2026
- Fed cuts rates as dissents loom at key December meeting
Meanwhile, layoffs have swelled as companies retrench to offset the profit hit caused by tariffs, pushing the unemployment rate to 4.6% in November, up from 4% in January and 3.4% in 2023.
Inflation’s rise this summer kept the Fed on hold, much to the chagrin of the White House, which united in condemning Chairman Powell for keeping rates unchanged.
Still, the Fed did finally acquiesce in September, cutting rates by a quarter percentage point to shore up the jobs market. Then, it cut again at its meeting in October and again in December, as optimism that the tariffs’ impact on inflation will ease. Altogether, rates fell 0.75% in 2025, providing a catalyst for investors to anticipate that lower rates will support borrowing (and corporate profits) in 2026.
Fed rate cut odds decrease for January 2026
After cutting interest rates in December, the Fed struck a relatively hawkish tone. It kept the door open to cutting rates in 2025 depending on data, but its dot-plot, a closely watched forecast of Fed officials’ predictions, suggests only one more cut coming in 2026.
Unsurprisingly, that outlook has taken a lot of air out of hopes for another rate reduction at the January meeting.
Related: Every major Wall Street analyst’s S&P 500 forecast for 2026
The odds of another quarter percentage point reduction at 2026’s first FOMC meeting were just 23% one month ago, according to the CME’s FedWatch tool.
Since then, we have received the updated inflation figures for October, showing that inflation has retreated (again, with an asterisk due to missing data), and November’s unemployment rate, which indicates that the labor market remains impaired.
“Excluding tariffs, we estimate that inflation has continued to fall and now stands at 2.3%,” wrote Goldman Sachs economists in a research note shared with TheStreet co-Editor-in-Chief Todd Campbell. “The job market outlook is less inspiring, in part because the ongoing productivity acceleration raises the bar for how much GDP growth is needed to create jobs.”
That combination should be dovish, given that lower inflation provides cover for rate cuts that could help improve job growth.
Yet the CME’s FedWatch tool has actually worsened, with probabilities of a cut in January declining to 17.7% as of December 28.
The 10-year Treasury note yields, a barometer used by companies to inform whether to proceed with new projects and by banks to set mortgage rates, similarly offer little conviction that the Fed may cut.
Instead of falling, the 10-year Treasury yield has increased to 4.13% from 3.99% at the end of November, before December’s FOMC decision to lower rates.
More jobs and inflation data loom
The odds of another rate cut in January aren’t very good, but they could change. The Bureau of Labor Statistics is expected to roll out updated inflation and jobs data before FOMC members vote in January.
The Job Openings and Labor Turnover Survey (JOLTS) report for November will be released on January 7. More importantly, however, will be the December unemployment report on January 9 and the December CPI inflation report on January 13.
Key economic data before the FOMC meeting on January 28:
- January 7: Job Openings and Labor Turnover Survey (JOLTS)
- January 9: BLS employment situation report (December)
- January 13: BLS CPI inflation report (December)
If unemployment continues to rise and the December CPI confirms the October result (there will be no November CPI due to the shutdown), then the odds could shift toward a rate cut. However, if unemployment steadies and inflation ticks higher, the Fed will have plenty of reason to return to the sidelines again.
Goldman Sachs’ latest forecast suggests you might not want to get your hopes up. It expects just two cuts for the entirety of 2026.
“We expect the Fed to cut by 50bp to 3-3.25%,” wrote Goldman Sachs.
Related: Longtime analyst resets Nvidia stock price target ahead of 2026
