Looking back at the wild ride of last year, it’s honestly kind of hilarious how much the "experts" missed the mark. If you were following the headlines back in January 2025, the big talk wasn't about cuts. It was about whether the economy was too hot to handle. Everyone was obsessed with the 2025 fed rate hike probability, fearing that sticky inflation and a resilient labor market would force Jerome Powell to twist the knife even further.
But, as we now know from the comfort of early 2026, the script didn't just flip—it was shredded.
The Federal Reserve didn't hike rates once in 2025. Not even a little bit. Instead, they spent the back half of the year frantically trying to keep the plane from clipping the trees, delivering three separate 25-basis-point cuts in September, October, and December. We started the year at a target range of 4.25%–4.50% and ended it at 3.50%–3.75%.
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So, how did the probability of a hike go from a "serious concern" to a historical footnote? It’s a mix of bad data, political chaos, and a labor market that finally decided to take a nap.
The Ghost of the 2025 Fed Rate Hike Probability
At the start of 2025, the CME FedWatch Tool—which is basically the gambling floor for interest rate nerds—wasn't exactly screaming "hike," but it wasn't dismissing it either. Inflation was hovering around 3%, well above the Fed's 2% holy grail.
People were genuinely spooked.
I remember talking to a few portfolio managers in April who were convinced that the "Liberation Day" tariffs (remember that mess?) would send prices so high that Powell would have no choice but to raise rates. The logic was simple: tariffs equal higher costs, higher costs equal inflation, and inflation equals a Fed rate hike. For a few weeks there, the 2025 fed rate hike probability actually started to tick upward in the futures market.
But then, the data vacuum happened.
The government shutdown in late 2025 really messed with everyone's heads. Without official jobs reports or CPI prints for a stretch, the Fed was basically flying blind. When the fog finally cleared, the "booming" labor market looked a lot more like a "barely breathing" labor market. The unemployment rate, which everyone thought was anchored at 4%, drifted up to 4.4% by September.
That was the nail in the coffin for hike talk.
Why the "Hike" Narrative Died
- The Labor Market Loosened: It wasn't a crash, but it was a definitive cooling. Job gains slowed to a crawl over the summer.
- Tariff Deflation (Wait, what?): While the fear of tariffs caused a temporary price spike, the actual impact was a massive slowdown in consumer spending. People got scared and stopped buying stuff, which actually helped cool inflation faster than the Fed expected.
- The Insurance Cut Mentality: By the time December rolled around, Powell was calling the cuts "insurance." They weren't cutting because the house was on fire; they were cutting because they smelled smoke in the basement.
The Three Dissents That Changed Everything
If you think the Fed is a monolith, you haven't been paying attention to the minutes lately. The December 2025 meeting was a total circus. We had three formal dissents, which is basically a bar fight in central banking terms.
On one side, you had Governor Stephen Miran—a Trump appointee—screaming for a 50-basis-point cut to save the economy from a hard landing. On the other, regional presidents like Jeffrey Schmid (Kansas City) and Austan Goolsbee (Chicago) were still worried that inflation hadn't been fully defeated. They actually wanted to hold rates steady.
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They weren't arguing for a hike anymore, but they were definitely standing in the way of the "easy money" train. This division is exactly why the 2025 fed rate hike probability shifted so radically. The Fed wasn't a unified front; it was a group of people looking at the same map and disagreeing on which way was north.
What Most People Get Wrong About 2025
A lot of folks think the Fed cuts rates because they want to. Honestly, they usually do it because they have to.
The 2025 cycle was unique because the Fed was trying to find "neutral." That’s the magical interest rate where the economy isn't being squeezed but isn't being over-caffeinated either. Powell spent most of his late-2025 press conferences insisting that a 3.5%–3.75% range was "close to neutral."
But let’s be real. If you’re a first-time homebuyer looking at a 6.2% mortgage rate in early 2026, "neutral" feels a lot like "expensive."
The big misconception was that the Fed would only hike if inflation stayed high. People forgot about the "dual mandate." The Fed also has to worry about jobs. When the unemployment rate hit that 4.5% psychological barrier in some forecasts, the "hike" talk vanished instantly. It didn't matter if core PCE was still at 2.8%; people were losing jobs, and that's the one thing that makes the Fed move faster than a tech stock after an earnings beat.
Actionable Insights for the 2026 Landscape
So, what do we do with this information now that 2025 is in the rearview mirror? If you're managing money or just trying to figure out if you should refinance your house, here's the deal:
- Ignore the "Dot Plot" Drama: The Fed's own projections (the famous Dot Plot) only signaled one cut for 2026. But remember, at the start of 2025, they weren't predicting three cuts either. The market (and the Fed) is reactive, not proactive.
- Watch the Unemployment Ceiling: If the unemployment rate stays around 4.4% or 4.5%, don't expect any more hikes. The Fed is much more scared of a recession than it is of 2.5% inflation right now.
- Prepare for a "Higher for Longer" Plateau: Even with the cuts, we aren't going back to 0% interest rates. The "new normal" is likely somewhere between 3% and 3.5%.
- The Leadership Factor: Jerome Powell's term as Chair ends in May 2026. Names like Kevin Warsh and Kevin Hassett are being floated. These guys might have a very different view on the 2025 fed rate hike probability logic—they might be more inclined to slash rates further to please the White House, regardless of what the inflation data says.
The reality is that the probability of a rate hike in 2025 was always a ghost story we told ourselves because we were traumatized by the 2022-2023 cycle. The economy proved to be more fragile than the "higher for longer" crowd wanted to admit.
As we move deeper into 2026, the focus has shifted entirely. We aren't looking for hikes anymore; we're looking for the floor. And based on the current FOMC fractiousness, we might be looking for it for a long time.
Keep your eye on the PCE deflator and the weekly jobless claims. Those are the only two numbers that actually matter anymore. Everything else is just noise.
Check your high-yield savings account rates regularly. They’ve already started to dip as the Fed funds rate dropped to 3.64% effective this month. If you’ve been sitting on cash, the window to lock in those 4% or 5% CDs is officially closed. Moving forward, the strategy should be about duration—locking in yields where you can find them before the Fed takes another bite out of the benchmark.