As 2025 closes with the Federal Reserve having delivered its third consecutive interest rate cut, markets are signaling a clear expectation: the cutting cycle is on pause. According to CME Fed Fund futures, there's an 82.6% probability that the Fed will hold rates steady at its January 27-28 meeting, leaving the federal funds rate at the current 3.50-3.75% range.

But the more consequential question looming over markets isn't what happens in January—it's who will be making these decisions come summer. Jerome Powell's term as Fed Chair expires on May 15, 2026, and the succession battle is already underway.

Why the Fed Is Expected to Pause

After cutting rates three consecutive times since September 2025, bringing the federal funds rate down from 4.50% to 3.75%, the Federal Reserve finds itself in a familiar bind: inflation remains stubbornly above the 2% target, while the labor market shows signs of cooling.

The December FOMC meeting revealed deep divisions among policymakers. The quarter-point cut passed by a 9-3 vote—the most dissents since 2019—with Kansas City Fed President Jeffrey Schmid and Chicago Fed President Austan Goolsbee voting to hold rates steady.

Key factors driving the pause expectations:

  • Inflation at 2.7%: November's annual inflation reading, while down from 3% in September, remains above the Fed's comfort zone
  • Labor market resilience: Initial jobless claims dropped to 199,000 in the final week of December, the lowest since late November
  • Data disruption: The 43-day government shutdown earlier this year delayed key economic reports, leaving the Fed with incomplete information
  • Tariff uncertainty: New trade policies continue to cloud the inflation outlook

"The Fed is torn between cutting rates to boost a faltering job market or keeping them high to subdue inflation that is still over the Fed's 2% goal."

— Federal Reserve Meeting Analysis

The Powell Succession Battle

While short-term rate decisions grab headlines, the more significant story is the approaching end of Jerome Powell's tenure. His term as Fed Chair expires on May 15, 2026, and Treasury Secretary Scott Bessent has been tasked with recommending a successor to President Trump.

Four candidates have emerged on the administration's short list:

1. Kevin Hassett (Front-Runner)

The Director of the National Economic Council is widely reported to be the leading candidate. Hassett, a long-time advocate for interest rate cuts and tax reductions, would represent a more dovish approach than Powell. His selection could signal a more accommodative Fed policy ahead.

2. Kevin Warsh

A former Fed Governor who has been a vocal critic of the central bank's recent policies, Warsh brings inside experience but has clashed with the Fed establishment. He joins Hassett as a top-tier contender.

3. Christopher Waller

Currently serving as a Fed Governor, Waller would represent continuity within the institution. His selection would likely be less disruptive to markets than an outside appointment.

4. Michelle Bowman

The Fed's Vice Chair and a firm advocate for reducing banking regulation, Bowman has been a consistent voice for a more business-friendly approach to monetary policy.

BlackRock's Rick Rieder has also been mentioned as a potential dark horse candidate.

What Powell's Exit Means for Markets

Powell has indicated he won't leave before his term ends, but he's also signaled he's unlikely to remain as a Fed Governor after his successor is confirmed. This clean break would mark the end of an era that saw the Fed navigate the COVID pandemic, historic inflation, and the most aggressive rate hiking cycle in four decades.

A new Fed Chair—particularly one aligned with the administration's preference for lower rates and deregulation—could reshape monetary policy for years to come. Markets will be watching the confirmation process closely for signals about the future direction of interest rates.

The 2026 Rate Path Divergence

Looking beyond January, there's significant disagreement about where rates are headed. The Fed's December projections suggest just one more 25-basis-point cut in 2026, bringing rates to 3.50-3.75%. But Wall Street firms see more easing ahead:

  • Goldman Sachs: Forecasts two cuts in 2026, targeting 3.00-3.25%
  • Morningstar: Expects two cuts, one more than the Fed projects
  • iShares: Anticipates a pause early in the year followed by gradual cuts

The Trump administration, meanwhile, expects robust 3% economic growth that would allow the Fed to continue cutting rates without stoking inflation.

What Investors Should Watch

With the January meeting expected to be a non-event, investors should focus on:

  • The Fed Chair nomination timeline: An announcement is expected in early 2026
  • Senate confirmation dynamics: The new chair will need bipartisan support
  • March meeting expectations: Currently priced at roughly 50/50 for a hold vs. cut
  • Inflation data: Any upside surprises could push rate cut expectations further out

As 2026 begins, the Fed enters its most uncertain period in years. The combination of a lame-duck chair, divided policymakers, and an administration eager for lower rates sets the stage for significant monetary policy drama in the months ahead.

For now, markets expect the Fed to do nothing in January—and that may be the wisest course until the leadership picture becomes clearer.