The Federal Reserve's decision to hold steady in January has been priced in, and the market is not expecting a rate cut until as early as June.

The probability of the Federal Reserve cutting interest rates in January has essentially dissipated. According to the latest news, after the December non-farm payroll data was released, the market priced in no rate cut in January based on interest rate futures and Treasury movements, with the earliest rate cut now postponed to June. This reflects the complex state of the employment market and the Fed’s cautious stance amid changes in tariff policies.

The Mixed Signals of Employment Data

December US employment data showed a typical mixed picture:

This contradictory data combination provides the Fed with a reason to continue observing. Although the unemployment rate has improved, other employment indicators are weakening, indicating that the US job market is in a mild downward trend. This is not enough to prompt the Fed to cut rates urgently and instead reinforces its decision to hold steady.

Market Pricing and Policy Expectations

From the market’s reaction, this employment data has been fully digested. The interest rate futures market clearly prices in no rate hike in January, indicating a consensus on the central bank’s policy path. The earliest rate cut expectation has been pushed back to June, giving the Fed enough time to observe further economic developments.

What are the key variables? The Supreme Court may soon declare the IEEPA tariffs unconstitutional. If this ruling materializes, it would reduce uncertainty around tariff policies, potentially marginally improving economic outlooks and easing inflation pressures. However, fiscal deficits could worsen. Under this scenario, the Fed’s policy options would become more complex.

Short-term Market Divergence

The Fed’s reluctance to cut rates combined with easing tariff pressures could lead to asset-specific divergences:

• US stocks benefit: Supported by AI boom and reduced tariff disruptions, especially in sectors like consumer staples and industry that were previously under tariff pressure
• Dollar strengthens: Sustained high interest rates continue to support the USD
• US Treasuries under pressure: With no rate cuts and tariffs cooling, Treasuries lack support, increasing the likelihood of short-term high yields

Summary

The market has already priced in no rate cut in January by the Fed, with the earliest opportunity now pushed to June. The logic behind this is that, although there are bright spots in the employment market, the overall trend is weakening, giving the Fed ample reason to wait and see. Changes in tariff policies add uncertainty to this outlook, but in the short term, the pattern of US stocks benefiting and Treasuries under pressure remains relatively clear. The focus moving forward should be on economic data and the final outcome of tariff policies before June.