TD Securities forecasts the Federal Open Market Committee (FOMC) to hold current interest rates in its upcoming meeting, with potential interest rate reductions projected from March. Enhanced GDP growth projections stem from increased personal spending and anticipated tax refunds.
Economic activity is expected to remain strong at the beginning of 2026, influencing the Federal Reserve’s policy decisions. While FOMC risk management cuts have concluded, there is increased reliance on data to justify any further easing measures. Jerome Powell, the Fed Chair, may indicate noncommittal sentiments about imminent rate reductions, while reaffirming the possibility of easing within the year.
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With the Federal Open Market Committee expected to keep rates on hold this week, we should anticipate a stronger US Dollar. The latest advance estimate for Q4 2025 GDP showed a surprising 2.9% annualized growth, fueled by strong consumer spending, which gives the Fed room to wait. This suggests short-term call options on the dollar index (DXY) or put options on currency pairs like EUR/USD could be considered.
FOMC Strategic Considerations
This upcoming meeting marks a shift from the “risk management” cuts we saw in the second half of 2025, which were designed to ease policy back from restrictive levels. Now, with the economy showing resilience, the justification for more cuts is much higher. Therefore, traders should consider strategies that profit from increased volatility, such as straddles on major indices ahead of the announcement.
Market pricing needs to be watched closely, as fed funds futures are still showing a roughly 65% probability of a rate cut by the March meeting. If the Fed’s statement sounds noncommittal, these odds will drop, leading to a rapid repricing in short-term interest rate futures. This presents an opportunity for those positioned for a more hawkish-than-expected tone from the central bank.
The robust labor market, which added 210,000 jobs in December 2025, alongside a core inflation rate holding at 3.1%, supports this cautious stance. This economic backdrop could weigh on equity index futures, as the prospect of delayed rate cuts may temper the rally we have seen in the S&P 500. We should prepare for a potential pullback if the market perceives the Fed’s message as “higher for longer.”
Looking back at 2025, we saw markets consistently trying to get ahead of the Fed, similar to the dynamic we observed in late 2023. We believe the central bank will use this meeting to push back against the market’s aggressive easing expectations. This suggests positioning for a flatter yield curve, as near-term bond yields may remain elevated while longer-term yields stay anchored by eventual easing expectations.
