Chart of the week: the elusive rate cut
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The chart below traces evolving expectation for the US Federal Funds rate, comparing where traders anticipated rates would be in September 2025, January 2026, and January 2027.
A year ago, markets were pricing in significant cuts, expecting today’s rate to be far below the 4% reached after yesterday’s 0.25% reduction. This optimism was dashed by stubborn inflation, tariff uncertainty, and surprisingly resilient labour market data. Recent deterioration in employment data, however, has seen January 2026 expectations start to fall once again, anticipating further cuts to come.
In contrast, expectations for January 2027 rates have had a somewhat different trajectory. They started to trend lower at the beginning of 2025 and stayed near their lowest levels, even as nearer-dated expectations rose over the summer. This is important, because it suggests a growing belief that political pressures could eventually see rates set at levels below where a prudent central bank might have pitched them in cycles gone by.
This perceived politicization adds a layer of unpredictability. While rate cuts are ostensibly positive for asset prices in the near term, if rates are cut too far, stimulating growth beyond the economy’s capacity, inflationary pressures will inevitably take the strain. Real and currency-adjusted returns for bonds and equities may disappoint in this scenario relative to nominal returns. The limited dissent in yesterday’s rate cut vote gives some cause for optimism, but for investors, analysis of the political and psychological drivers of policy will continue to require the same rigour as that of the economic data itself.
