The January FOMC meeting is expected to keep interest rates unchanged. BNY’s Macro Strategist notes there is only a slight 3.4% chance of a rate cut, with the Federal Reserve likely to stay steady in the near future. Attention will center on inflation risks and the labor market. Market predictions indicate that any changes to rates won’t happen until at least July. The federal funds rate at the end of the year is expected to be 45 basis points lower than the current target of 3.75%, settling at 3.64%. Anticipated modest changes in rates could extend through the end of 2026 into 2027, with the projected rate for December 2027 close to that of this December.

Meeting Expectations

The upcoming meeting is likely to be routine in terms of monetary policy. There will be no Summary of Economic Projections released in January. Instead, only the policy statement and a post-meeting press conference featuring Chair Powell will follow. (This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.) As the January FOMC meeting nears, no changes to the policy rate are anticipated. Current market indicators, reflected in the CME FedWatch Tool, show over a 95% likelihood that the federal funds rate will remain stable. As a result, traders will focus on the details of the policy statement and any shifts in tone during the press conference. This expected pause is backed by recent economic data, leaving the Federal Reserve with little reason to act. The last Consumer Price Index reading for December 2025 showed a 3.2% increase, still above the 2% target, but showing moderation. A strong labor market, with the unemployment rate steady at 3.8%, gives the central bank further reason to maintain its cautious approach. For derivative traders, this period of predictable policy implies less volatility in interest rates. The MOVE index, which measures bond market volatility, is significantly lower than the highs seen in mid-2025. This creates opportunities for strategies such as selling strangles on interest rate futures, which involves selling both an out-of-the-money call and put option to earn premiums, betting that rates won’t fluctuate dramatically.

Outlook for Rate Cuts

In the upcoming weeks, fed funds futures do not foresee any rate cuts until at least the third quarter of 2026. This stable period stands in contrast to the aggressive policy changes we saw leading up to the last pause in 2025. Therefore, it’s expected that implied volatility will stay low, causing long-dated options to lose value over time. Create your live VT Markets account and start trading now.

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