Speculators are dialing back expectations for Federal Reserve interest rate cuts in 2025 ahead of the March Federal Open Market Committee meeting, as inflation concerns cast doubt on the central bank's willingness to ease policy.

Data from Kalshi, a CFTC-regulated betting platform, indicates that traders are shifting bets toward fewer than three rate cuts.

The most favored scenario now anticipates two cuts, carrying a 24% implied probability. Notably, the likelihood of just one rate cut jumped seven percentage points in a single day to 19%.

Betting-implied odds currently indicate that the most preferred outcome among retail bettors is two rate cuts at a 24% implied chance.

The Fed's December “dot plot” signaled a median expectation for two rate cuts in 2025, a downgrade from the four cuts it had projected in September.

While retail bettors have turned more cautious, broader financial markets remain slightly more optimistic. Fed funds futures, tracked by the CME FedWatch tool, fully price in three rate cuts by December 2024, with a 35% probability of a fourth cut.

This discrepancy suggests that institutional investors may still believe in a more accommodative Fed policy than retail traders do.

What's Driving The Shift?

One factor weighing on rate-cut expectations is the risk that the Fed could revise inflation projections higher, particularly in response to higher trade tariffs mandated by President Donald Trump.

December, the central bank had already raised its 2025 inflation forecast, projecting headline Personal Consumption Expenditures inflation at 2.5%, up from 2.1% in September. Core PCE inflation, which excludes food and energy prices, was also revised up to 2.5% from 2.2%.

According to both Bank of America and Goldman Sachs estimates, inflation estimates could be upwardly revised to 2.7% on Wednesday.

Betting-implied odds tracked by Kalshi reveal that speculators expect inflation to average 3% in 2025.

A Dovish Tilt Or Continued Caution?

Federal Reserve Chair Jerome Powell has maintained a wait-and-see stance. Last week, he reiterated that the Fed does not need to rush into rate changes, reinforcing the need for more economic clarity before making any moves.

The consensus among economists is that the Fed will hold rates steady at 4.25%-4.50% at this week's meeting. Betting markets imply a near-unanimous probability of no change, but the focus will be on the Fed's revised economic outlook.

"The Fed will most likely indicate they remain data dependent," Chris Fasciano, chief market strategist at Commonwealth Financial Network, said in an email.

"Considering the better-than-expected CPI and PPI data released last week, if this trend continues it should allow the Fed to continue their rate cut path later in the year."

"The US Federal Reserve is widely expected to stay put this month. The market's focus will be on the guidance and the updated FOMC forecast," said Julien Lafargue, chief market strategist at Barclays Private Bank and Wealth Management.

He added that the Fed's projections may reflect weaker GDP growth, but the dot plot is unlikely to show a major shift.

The U.S. dollar index – as tracked by the Invesco DB USD Index Bullish Fund ETF – fell to a six-month low on Tuesday, as fears over U.S. economic performance persist among investors.

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