Trump’s Impossible Bet: Rate Cuts Or Political Survival

What Happened

But the picture shifts dramatically over a longer horizon. The probability of a rate cut by April rises to 81%, and by June it reaches 94%. For the full year, a two-cut scenario commands the highest probability at 24%, followed by three cuts (20%) and four cuts (17%). Combined, the likelihood of two or more cuts exceeds 87%.

December FOMC: A Divided Committee

The December FOMC meeting revealed just how fractured the Fed has become.

Market Context

A widening gap has emerged between the Federal Reserve and financial markets over the trajectory of US interest rates in 2026. While the Fed signals caution on further cuts, markets are betting on two to three reductions this year.

Markets Are Betting on Rate Cuts by Mid-Year

According to prediction market platform Polymarket, the probability of a rate cut at the January Federal Open Market Committee (FOMC) meeting stands at just 12%. Most participants expect rates to remain unchanged this month.

The CME FedWatch tool, which reflects expectations embedded in interest rate futures, paints a similar picture. The probability of a January hold stands at 82.8%, closely matching Polymarket. The likelihood of at least one cut by June is 82.8%, while the probability of two to three cuts by year-end reaches 94.8%.

The market consensus is clear: hold in January, begin cutting in the first half, and deliver two to three reductions by December.

Paulson, who holds a voting seat on the 2026 FOMC, stated that “some modest further adjustments to the funds rate would likely be appropriate later in the year” — but only if inflation moderates, the labor market stabilizes, and growth settles around 2%. She described the current policy stance as “still a little restrictive,” suggesting it continues to work toward lowering inflation pressures.

Her remarks stand in stark contrast to market expectations of a first-half rate cut. The message from the Fed’s hawkish camp is clear: don’t expect action anytime soon.

The Fed’s official guidance says one cut. Markets are pricing in two. Why the persistent gap?

Why Markets Are Betting on the Doves: The Trump Factor

The primary reason markets refuse to accept the Fed’s hawkish guidance is President Donald Trump.

More importantly, Fed Chair Jerome Powell’s term expires in 2026. The power to nominate his successor rests with the President. Market participants widely expect Trump to appoint someone more sympathetic to his preference for looser monetary policy.

Structural factors reinforce this view. The Fed has historically pivoted to rate cuts when the labor market weakens. FOMC divisions are deepening. And there are concerns that tariff policies could slow economic growth, adding pressure for monetary easing.

The market’s bet is straightforward: Trump’s pressure, combined with a potential economic slowdown, will eventually force the Fed’s hand.

Here lies the central irony. For Trump to effectively pressure the Fed, he needs political capital. But that capital is eroding — because of inflation.

Why It Matters

At the heart of this disconnect lies an uncomfortable paradox: President Donald Trump’s push for lower rates may be undermined by the very inflation that threatens his political survival.

Fed Hawks Signal No Rush

Inside the Fed, however, a different narrative is taking shape. On January 4, Philadelphia Fed President Anna Paulson indicated that further rate cuts may not be appropriate until “later in the year.”

The dot plot told an even more revealing story. While the median projection pointed to just one cut in 2026, the distribution was extensive. Seven officials projected no cuts at all, while eight saw two or more reductions. The most dovish projection suggested rates could fall as low as 2.125%.

Details

The committee cut rates by 25 basis points, bringing the target range to 3.5-3.75%. But the vote split 9-3, a wider margin than the previous 10-2 decision. Two members, Schmid and Goolsbee, preferred to hold rates steady. On the other end, Miran — widely viewed as aligned with the Trump administration — pushed for a 50-basis-point cut.

Since returning to the office, Trump has consistently pressured the Fed for lower rates. The December FOMC vote — where a Trump-aligned official pushed for aggressive easing — exemplifies this dynamic.

The Midterm Paradox: Inflation Is Trump’s Achilles’ Heel