What it measures
Fed policy expectations reflect market-implied probabilities of future interest-rate changes based on Federal Open Market Committee (FOMC) guidance and Fed funds futures. Investors track the expected path of the federal funds rate to assess when the U.S. central bank might cut, hold or hike rates, which influences bond yields, equity valuations and currency movements.
Recent trend
After an aggressive tightening cycle that lifted the federal funds rate above 5% in 2023, policymakers have held rates steady throughout 2025 while signalling patience. The Federal Reserve’s December 2025 projections show the median policy rate at 3.6 percent in 2025, 3.4 percent in 2026 and 3.1 percent in 2027【279975775508048†L176-L185】. Futures markets, which once priced several rate cuts in early 2025, have repriced toward a shallower easing path as inflation progress slowed and the economy remained resilient.
Six-month outlook
Expectations for the next six months lean toward a lengthy pause. In its latest outlook, RBC sees only a modest easing cycle beginning late in 2026, with the 10‑year Treasury yield edging higher to around 4.5% by the end of 2026 as growth remains solid【518335307822202†L202-L205】. We think the Fed is unlikely to lower rates until it gains greater confidence that inflation will return sustainably to target, implying the federal funds rate may remain near 5% through mid‑2026. Futures markets assign roughly even odds to one 25‑basis‑point cut by June 2026.
Signal
We assign a Yellow signal. Although investors are looking for rate cuts sometime in 2026, policymakers are emphasising patience and may keep the federal funds rate elevated longer than markets expect. With inflation still above target and the economy showing resilience, the probability of near-term cuts is low, creating a neutral to cautious policy backdrop.
