U.S. interest-rate futures briefly increased expectations for a Federal Reserve rate cut at its January policy meeting on Tuesday, following labor market data that showed a rise in unemployment, reinforcing signs that economic momentum may be cooling.
Futures tied to the federal funds rate — which reflect market expectations for overnight borrowing costs between banks — showed the probability of a January rate cut climb to around 31% immediately after the nonfarm payrolls report was released, up from roughly 22% beforehand. As markets digested the data, those odds eased back to about 24%, with traders still assigning a dominant 76% probability to the Fed holding rates steady next month.
The reaction underscores how sensitive markets remain to incoming labor data, as investors look for confirmation that higher interest rates are having the intended effect of slowing demand without triggering a sharp downturn. While job growth remained positive, the uptick in unemployment suggested some softening in labor conditions, a key variable the Fed has repeatedly highlighted in its policy assessments.
Economists have noted that Federal Reserve officials are likely to remain cautious, particularly with inflation data for November — including the consumer price index — also due this week. Persistent strength in services inflation and wage growth could limit the Fed’s willingness to move quickly, even as parts of the economy show signs of moderation.
Despite the brief rise in January cut expectations, U.S. rate futures continue to reflect a more gradual easing cycle. Markets are currently pricing in roughly two quarter-point rate cuts in 2026, amounting to about 59 basis points of easing, suggesting investors expect the Fed to maintain restrictive policy for an extended period before shifting more decisively toward accommodation.
Federal Reserve Chair Jerome Powell and other policymakers have emphasized that future decisions will remain data-dependent, with no preset path for rates. As a result, upcoming inflation and employment reports are likely to play an outsized role in shaping near-term market expectations.
