Ahead of the Federal Open Market Committee (FOMC) decision, the Fed funds futures market was pricing in 55 basis points of easing this year, which has now shifted to 65 basis points.
Despite the FOMC dot plot indicating a hawkish outlook, the market responded to the Fed Chair’s focus on transitory inflation, suggesting that the staff’s forecasts consider tariff impacts. The market appears to foresee weaker growth this year, allowing more room for potential rate cuts. By March 2026, the market has priced in three cuts, bringing the Fed funds rate to a range of 3.50-3.75%.
Market Reaction To Policy Expectations
That adjustment in rate cut expectations underscores the divide between policymakers’ projections and the sentiment reflected in futures pricing. While officials continue to signal a more restrained approach to monetary easing, traders have taken a different stance, interpreting recent statements alongside inflation commentary as indications that broader economic conditions may justify a looser policy stance sooner than previously anticipated.
Powell’s comments, particularly his remarks on temporary price pressures attributed to tariffs, suggest the central bank remains attuned to external influences on inflation. While the official rate path remains higher for longer, the response in futures pricing indicates that many anticipate a softer trajectory for policy rates than what Federal Reserve officials have laid out. That divergence should not be ignored.
Further out, the repricing throughout 2026 suggests an expectation that economic growth may slow sufficiently to prompt additional adjustments. Inflation trends remain a focal point, particularly given that prior estimates from the Fed retained a degree of caution. Lower rate pricing implies that traders believe policymakers may ultimately need to respond more aggressively than their own projections currently indicate.
Impact On Market Volatility
One outcome of that shift is an adjustment in volatility expectations. When market-implied rate paths differ from central bank guidance, price swings often emerge, particularly in rate-sensitive instruments. That divergence introduces opportunities, particularly for those positioned to take advantage of moments when perceived policy inertia collides with rapid changes in sentiment.
At this juncture, a repricing of Fed expectations is already in motion. That point alone suggests that over the coming weeks, movement in economic data could reinforce or challenge the assumptions underlying current market pricing. Any further indication that growth expectations are slipping will be met with heightened sensitivity.
