The next Federal Reserve meeting is two weeks away. Markets see almost no chance that policymakers will cut their key interest rate for a fourth-straight Fed meeting. However, Fed Chairman Jerome Powell's news conference will shape expectations for the subsequent Fed meeting in March and in the months to come.
The combination of a strong January jobs report but cooler-than-expected core CPI inflation reading hasn't really changed the picture. The not-so-bad news for the S&P 500 is that markets already expect a hawkish Fed, so there's little room for disappointment.
When Is The Fed Meeting Announcement?
The next Fed meeting wraps up on Jan. 29 with a 2 p.m. ET announcement. Powell's news conference begins at 2:30 p.m.
When Will The Fed Cut Again?
At the moment, markets don't see another Fed rate cut as likely until the June 18 meeting, when Wall Street is pricing in 61%-39% odds in favor of a rate cut, according to CME Group's FedWatch tool.
Odds of a rate cut stand at just 3% for the Jan. 29 Fed meeting, 24% for March 19 and 39% for the May 7 meeting.
For 2025, markets are pricing in a year-end federal funds rate of 4.02%. Market pricing builds in a strong likelihood of one quarter-point rate cut (80%), but odds of an additional 25-basis-point move are below even (43%-57%).
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Fed Policy Considerations
At least one further Fed rate cut is expected because policymakers still see their current interest-rate setting as restrictive, meaning it is acting as a brake on economic growth. The Fed aims to lift its foot off the brake to get to a neutral level before tight policy unnecessarily weakens the labor market.
Yet after cutting its key rate by 100 basis points since September, Powell said after the Dec. 18 meeting that the Fed is in a new phase: "We're going to be cautious about further cuts."
After that Fed meeting, Powell noted that the labor market was still cooling and that the Fed was still confident that inflation, though on a bumpy path, was trending toward 2%. While the solid December jobs report cast doubt on Powell's "cooling" labor market characterization, tamer-than-expected inflation readings for December have reinforced Wall Street's conviction that the next move in interest rates will be lower, not higher.
Still, since Dec. 18, market-based interest rates have moved substantially higher, with the 10-year Treasury yield rising as high as 4.8% for the first time since October 2023, While the 10-year yield has eased to around 4.68%, the higher long-term rates have contributed to a tightening of financial conditions, which weighs on economic growth and may influence Fed policy.
However, the elephant in the room is President-elect Donald Trump's policy agenda, including tax cuts, deregulation, tariffs and deportations. Many economists think those policies could contribute to higher inflation this year and stymie further Fed rate cuts, but there is huge uncertainty both about what is coming and how it will impact the economy.
Fed Meeting Agenda
The Fed's 2 p.m. policy statement will announce the decision whether to hold the federal funds rate steady or lower it by another 25 basis points.
Policymakers also will provide an update on the Fed's balance sheet policy. Each month, the Fed is currently letting up to $25 billion in Treasury securities and $35 billion in government-backed mortgage securities run off its balance sheet as they mature, rather than reinvesting the sum.
Assuming no rate cut, the S&P 500 reaction will likely depend on what Powell says at his news conference. Quarterly Fed economic projections, including each individual policymaker's assessment, won't be released again until the March meeting.
What Do Fed Rate Cuts Mean For The S&P 500?
The Fed sets monetary policy to meet its dual mandates for price stability and full employment. Policymakers cut interest rates when the balance of risks tilt toward inflation falling too low — below the Fed's 2% inflation target — or unemployment rising too high.
When the Fed is cutting rates, or even has a bias toward rate cuts, as it does now, the "Fed Put" is said to be in force. A put option gives investors downside protection if a stock falls below a certain price. When Wall Street says there's a "Fed Put," the implication is that Powell & Co. will ride to the rescue if the S&P 500 sells off, because a falling stock market could keep the Fed from achieving its mandates.
An environment in which the Fed is cutting rates doesn't ensure the S&P 500 will keep marching higher, but it does provide assurance that emboldens investors to buy the dip when markets correct.
History shows that the S&P 500 usually fares well in the 12 months following the Fed's first move to lower interest rates. Over the prior 11 rate-cutting cycles, the S&P 500 has averaged a 14.3% gain in the 12 months following the first cut. The median 12-month S&P 500 gain has been 20.1% over those 11 cycles. The major exceptions came after the Fed began cutting in 2001 and 2007, because Fed easing didn't prove sufficient to avert recession and a hit to S&P 500 earnings.
Through Wednesday, the S&P 500 has rallied 5.6% since the day before the Fed's surprise 50-basis-point rate cut on Sept. 18.
Be sure to read IBD's The Big Picture column after each trading day to get the latest on the prevailing stock market trend and what it means for your trading decisions.
Fed Meeting Calendar 2025
Jan. 28-29
March 18-19 (Quarterly rate and economic projections)
May 6-7
June 17-88 (Quarterly rate and economic projections)
July 29-30
Sept. 16-17 (Quarterly rate and economic projections)
Oct. 28-29
Dec. 9-10 (Quarterly rate and economic projections)
