The Federal Reserve is widely expected to chop its benchmark rate of interest by 1 / 4 percentage point on Wednesday. Under normal circumstances, a rate cut is seen as fuel for risk assets. This time, traders are preparing for something very different: a hawkish cut.
A hawkish cut is a scenario where the Fed lowers rates but refuses to signal that more relief is on the best way. For investors, that is the worst of each worlds. You get a small rate reduction, but you furthermore may get a central bank that remains to be clearly uneasy about inflation.
Expectations across Wall Street are firming around that possibility because the Fed enters its two-day policy meeting.
Why Traders Expect a Hawkish Cut
JPMorgan traders, citing evaluation from the firm’s head U.S. economist, laid out what a hawkish cut would seem like:
- The Fed’s dot plot shows just one potential rate cut next 12 months.
That consequence can be far tighter than what many investors and President Donald Trump want. Many market participants have been hoping for the start of a more accommodative rate cycle. A one-and-done projection would kill that hope quickly. - Jerome Powell signals lingering concern about inflation and avoids committing to future cuts.
Powell’s tone is commonly more influential than the speed move itself. If he indicates that inflation progress remains to be fragile, markets will interpret the cut as a reluctant adjustment somewhat than the start of a trend.
Wall Street is already positioning for this consequence. The ten-year Treasury yield has risen roughly 14 basis points in December, suggesting traders are bracing for less dovishness. The S&P 500 is flat for the month, an indication that equity investors are hesitant to tackle recent risk ahead of the meeting.
Adam Crisafulli of Vital Knowledge summarized the mood, writing: “The Fed is more likely to go on an prolonged pause after cutting on Wed.” He also acknowledged that talk of a hawkish cut has change into widespread across trading desks.
Futures Markets Agree: Do Not Expect Much More Easing
Fed funds futures pricing shows traders are assigning very low odds to a different rate cut anytime soon. Based on CME’s FedWatch tool, the subsequent reduction just isn’t expected until April.
This tug of war between the Fed and market expectations has been a defining theme of 2025: investors expect easing, however the central bank refuses to signal confidence that inflation is fully contained.
Why There Could Still Be Upside for the Market
Satirically, the heavy expectation of a hawkish consequence could create room for a positive surprise.
If the Fed’s dot plot shows barely more openness to cuts, or if Powell sounds less alarmed about inflation, risk assets could jump quickly. Barclays noted this dynamic in a message to clients, writing:
“The discussion has after all centered around a ‘hawkish’ cut – whatever that really means. … It is affordable to conclude that this consequence is basically discounted. That may presumably include no change to the 2026 dots or terminal rate, which is inline with Barclays Econ of just one cut next 12 months.”
They added that this setup means “the market just isn’t primed for a dovish consequence from this week’s meeting and must be a consideration for fast-money investors.”
In other words, if Powell is even barely softer than expected, the rebound might be sharp.
What a Hawkish Cut Means for Investors
It is a pivotal moment for markets. Here is how investors should give it some thought:
1. Expect Rate Volatility to Rise
Bond yields have already began moving higher. If Powell reiterates caution about inflation, short term yields could climb further. Rate-sensitive sectors like utilities, REITs, and high-dividend stocks may come under pressure.
2. Tech and Growth Stocks Could Whipsaw
Growth stocks thrive on rate relief. If Wednesday’s message is restrictive, tech could lag. Conversely, any hint of dovishness could trigger a quick momentum rally. Traders must be prepared for sudden reversals.
3. Financials May Profit
Banks often prefer a steeper yield curve. If long-term yields proceed rising while the Fed stays cautious, financial stocks may even see renewed interest.
4. The Dollar Stays Supported
A hawkish Fed typically keeps the U.S. dollar elevated in comparison with other major currencies. This matters for multinational corporations that generate large amounts of revenue abroad.
5. Commodities Could Stay Range-Sure
A good Fed stance often weighs on broad commodity demand since it implies slower economic activity moving forward.
The Greater Picture: The Fed Does Not Wish to Declare Victory
Inflation has cooled, however the last leg of disinflation is proving stubborn. Powell doesn’t wish to repeat the mistakes of past Fed chairs who cut too aggressively and allowed inflation to reignite.
The Fed believes the safest path is to maneuver slowly and maintain flexibility. For investors, the message is easy: the times of easy money aren’t coming back quickly.
Markets will dissect every word Powell says on Wednesday, on the lookout for any shift in tone.