Fed Meeting Preview: Will the FOMC Disappoint Stock Markets?

Stock markets hope the Fed will set the stage for faster rate cuts. They are likely to be disappointed.

• Markets want faster Fed rate cuts despite solid growth and inflation risks
• Traders seem to want cheaper money to hedge against policy uncertainty
• Stocks may be at risk if Fed Chair Powell argues against dovish urgency

All eyes are back on the Federal Reserve as traders continue to hope for sped-up interest rate cuts, but the US central bank may struggle to deliver as a chipper economy and bubbling inflation expectations argue for restraint. That seems unlikely to sit well with the stock market.

That stimulus will be expanded when the rate-setting Federal Open Market Committee (FOMC) gathers for its first conclave of 2026 has been a long shot for months. Now, benchmark Fed Funds interest rate futures show that the probability of a standard 25-basis-point (bps) reduction is just 4.4%, while that of a hold is 95.6%.

This means that any market-moving potential rests with whatever might be said in the text of the statement published alongside the policy announcement, as well as what Fed Chair Jerome Powell says in the press conference to follow. A dovish lead from either seems difficult to justify.

Can the Fed make the case for faster rate cuts?

The US economy put on a strong showing in the third quarter. Gross domestic product (GDP) growth accelerated to an annualized rate of 4.37%, the highest in two years. Leading purchasing managers index (PMI) data suggests output continued to expand at a solid clip in the final three months of 2025.

The latest PMI readings from S&P Global show the pace of economic activity growth stabilized near the two-year trend average following the COVID-19 pandemic in January after cooling in the fourth quarter. This hints that the impact of a record-long US government shutdown in October is already dissipating.

Parallel PMI data from the Institute for Supply Management (ISM) is even more optimistic. Its survey results suggest that the cumulative pace of manufacturing- and service-sector activity growth hit a 10-month high in December. The Atlanta Fed’s closely watched GDPNow model has the annualized growth rate on pace to hit 5.4% in the fourth quarter.

Fed officials would be hard-pressed to justify that the labor market needs more help and that inflation is comfortably contained against this backdrop, especially as 100bps in cuts from late 2024 and another 75bps from 2025 filter into the economy. The Fed has estimated that it can take 12-18 months for a single rate cut to be fully absorbed.

Inflation worries may return as crude oil prices rise

Rising crude oil prices make the dovish argument still harder to defend. The benchmark WTI contract is consolidating gains near a three-month high after breaking the downtrend guiding it lower since June last year. That has come as US efforts disrupt sanctions-busting oil shipments from Venezuela and Russia, and as Iran flirts with a popular revolution.

Changes in oil prices tend to appear in consumer price index (CPI) inflation data with about a one-month lag. This makes it understandable that breakeven inflation expectations embedded in the Treasury bond prices have been marching higher alongside WTI since the beginning of the year.

Nevertheless, traders seem to want more stimulus than the central bank has committed to deliver. They’ve priced in 44 basis points in cuts for 2026, whereas FOMC officials have consistently penciled just 25bps into their Summary of Economic Projections (SEP) since June.

This hunger for policy support despite solid economic performance and credible reflation risk seems to flow from worries about fiscal policy uncertainty and a desire for the availability of cheap credit to cushion against unexpected shocks. The S&P 500 has tellingly failed to make a new high since October, when Powell chastised markets for being too dovish.

Just his month, the US captured and extradited Venezuela’s president Nicolas Maduro and threatened to punish Europe with tariffs unless it takes over ownership of Greenland from Denmark, before walking back the demand. Meanwhile, federal prosecutors threatened to indict Chair Powell, in a move he denounced as political pressure.

Ilya Spivak, tastylive head of global macro, has over 15 years of experience in trading strategy, and he specializes in identifying thematic moves in currencies, commodities, interest rates and equities. He hosts Macro Money and co-hosts Overtime, Monday-Thursday. @Ilyaspivak

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