Key Takeaways
- Prediction markets are signalling a significant disconnect with official Federal Reserve guidance, pricing two rate cuts in 2025 as the most probable outcome, in stark contrast to the Fed’s own median projection which implies four.
- This divergence suggests the market holds a more hawkish view than the Committee, betting that persistent inflation, fiscal pressures, or a resilient economy will prevent the Fed from delivering its anticipated easing cycle.
- The shifting odds on platforms like Polymarket, where three cuts have overtaken one cut as the second most likely scenario, indicate fluid sentiment but one that remains anchored well below the Fed’s stated intentions.
- This scepticism has material implications for asset allocation, favouring a more cautious stance on duration in fixed income, a focus on quality and pricing power in equities, and a potentially stronger US dollar for longer.
While Federal Reserve officials map out a path of steady monetary easing for 2025, real-money prediction markets are telling a rather different story. The consensus forming on these platforms is not one of enthusiastic dovishness, but of pronounced scepticism. Currently, the most probable scenario being priced for 2025 is a mere two interest rate cuts, with the odds for three cuts recently pulling ahead of just one. This forecast stands in stark contrast to the Federal Reserve’s own Summary of Economic Projections, creating a fascinating divergence between the official narrative and the crowd’s wisdom.
The Crowd Versus the Committee
The core of the matter lies in comparing two different sources of truth: the Federal Open Market Committee’s (FOMC) “dot plot” and the implied probabilities from decentralised betting platforms. The Fed’s June 2024 projections showed a median expectation for the Fed Funds Rate to end 2025 at 4.1%. Assuming one cut occurs in 2024, this implies a further 100 basis points of easing, or four standard 25-basis-point cuts, during 2025. This is the official roadmap for a “soft landing,” where inflation recedes smoothly, allowing for a steady normalisation of policy.
Prediction markets, however, are pricing a much shallower path. They reflect a collective belief that the Fed will be unable, or unwilling, to cut so aggressively. The divergence is not trivial; it represents a 50-basis-point difference in the expected policy rate by the end of next year, a significant gap in the world of fixed income and risk pricing.
| Scenario for Cuts in 2025 | Polymarket Implied Probability | Implied by Fed June 2024 SEP | Underlying Rationale for Divergence |
|---|---|---|---|
| Four Rate Cuts (100 bps) | Low | Median Projection | The market is pricing in a lower probability of the Fed’s “soft landing” base case. |
| Three Rate Cuts (75 bps) | Second Highest | Dovish Outlier View | A compromise scenario, but still reflects doubt about the Fed’s ability to complete its planned cycle. |
| Two Rate Cuts (50 bps) | Highest | N/A | The market’s base case: inflation proves too stubborn or growth too resilient for aggressive easing. |
| One Rate Cut (25 bps) | Third Highest | N/A | Represents a more hawkish view where the Fed is forced to keep policy tight for nearly all of 2025. |
Note: Probabilities are dynamic and reflect sentiment at the time of writing. The Federal Reserve SEP reflects the median projection and not a consensus of all members.
Interpreting the Market’s Scepticism
Why would the market bet against the very institution that controls the policy rate? The rationale is multifaceted, rooted in the intractable nature of the current macroeconomic environment.
The Stubborn “Last Mile” of Inflation
First is the problem of inflation’s final descent. While headline figures have cooled considerably from their peaks, core services inflation remains uncomfortably high. The market appears to believe the “last mile” of returning to the 2% target will be a gruelling slog, not the gentle glide path the Fed’s forecasts seem to imply. Structural forces, including a tight labour market and the ongoing costs of deglobalisation, may keep inflationary pressures more elevated than models suggest, effectively tying the Fed’s hands.
Fiscal Dominance and Political Uncertainty
Second, the influence of fiscal policy cannot be ignored. With significant government spending and deficits, fiscal policy is working at cross-purposes with monetary tightening. The market may be forecasting that regardless of the political outcomes in the near future, fiscal largesse is likely to continue, adding a persistent inflationary impulse that will force the Fed to maintain a higher-for-longer policy stance to compensate.
A Reassessment of Economic Resilience
Finally, there is the simple fact of economic resilience. Despite the most aggressive hiking cycle in decades, the US economy has avoided a deep recession, and the labour market remains robust. The market may be interpreting this resilience not as a precursor to a soft landing, but as a sign that the neutral rate of interest (r*) is structurally higher than previously thought. If the economy can withstand rates above 5% without collapsing, the justification for four cuts in 2025 becomes substantially weaker.
Positioning for a Policy Disconnect
This gap between market pricing and Fed projections offers both risks and opportunities. A portfolio positioned for the Fed’s four-cut scenario, likely involving long-duration bonds and rate-sensitive growth equities, would perform poorly if the market’s more hawkish two-cut view proves correct. Conversely, positioning for two cuts means accepting a higher-cost-of-capital environment for longer.
This suggests a cautious approach. In fixed income, it may argue for favouring the front end of the curve or instruments that offer protection from stubborn rates. In equities, the focus shifts from speculative growth towards quality companies with strong balance sheets and demonstrable pricing power—businesses that can thrive without the tailwind of rapidly falling interest rates. For currency markets, a Fed that under-delivers on easing would provide fundamental support for a stronger US dollar, with knock-on effects for emerging markets and commodity prices.
Ultimately, the prediction markets are not forecasting economic collapse. Instead, they are signalling a belief in a different, more challenging economic reality than the one sketched out by policymakers. As a final, speculative thought, perhaps the true risk is not the number of cuts, but their catalyst. The market may be right about the Fed being unable to deliver four gentle cuts. But the reason could be that holding rates too high for too long eventually triggers a financial stability event, forcing an abrupt and disorderly pivot. In that scenario, the Fed may still cut, but not from a position of strength, and the market reaction would be anything but placid.
References
StockMKTNewz. (2024, September 10). *Betting markets still think 2 rates in 2025 is the most likely outcome Polymarket currently has 3 rate cuts as the 2nd most likely outcome now in front of just 1 rate cut*. Retrieved from https://x.com/StockMKTNewz/status/1854193359780208788
Polymarket. (n.d.). *How many Fed rate cuts in 2025?* Retrieved from https://polymarket.com/event/how-many-fed-rate-cuts-in-2025
Polymarket. (n.d.). *Fed Rates Dashboard*. Retrieved from https://polymarket.com/dashboards/fed-rates
Reuters. (2024). *Fed rate cut bets rise after Powell doesn’t rule out July*. Retrieved from https://www.reuters.com/business/fed-rate-cut-bets-rise-after-powell-doesnt-rule-out-july-2025-07-01/
Crypto Briefing. (2024). *Fed rate cuts in September? Here’s what Polymarket says*. Retrieved from https://cryptobriefing.com/fed-rate-cuts-polymarket/
Federal Reserve. (2024, June). *Summary of Economic Projections*. Retrieved from the official Federal Reserve website.
