What is a basis point? The probability that the Fed will keep rates unchanged in January is 84.5%.

The term “basis points” frequently appears in financial markets. Understanding this unit is essential to grasp the Federal Reserve’s interest rate outlook. As of the latest interest rate forecast released by CME at the end of last year, the probability that the Federal Reserve will hold rates steady in January has reached 84.5%. Let’s take a closer look at what the market’s expectations are.

Basic Concept of Basis Points (bp)

A basis point is a unit of measurement for interest rates and yields, meaning 1 basis point = 0.01%. In other words, 25 basis points correspond to a 0.25% change in interest rates. This unit is used in financial markets to accurately express very small changes in interest rates. When the Fed cuts rates by 0.25%, it is described as a “25 basis point cut.”

Probability of the Fed Holding Rates Steady in January Is Dominant

According to the latest data from CME’s “FedWatch” tool, the outlook for the Fed to implement a 25 basis point rate cut in January is only 15.5%. Meanwhile, the probability of holding rates steady is overwhelmingly high at 84.5%. This suggests that, given the current economic conditions, the Fed is likely to maintain a cautious stance on interest rates. Most market participants expect the pace of rate cuts to slow down in the future.

Interest Rate Outlook Through March Next Year

Looking further ahead, the cumulative interest rate trajectory until March next year is more complex. The probability of a 25 basis point rate cut during this period is 42.2%, the probability of rates remaining unchanged is 51.8%, and the probability of a 50 basis point cut is 6.0%. In other words, the market slightly favors the scenario of rates remaining steady but also incorporates some possibility of rate cuts. As small adjustments in basis points continue, investors are in a phase of assessing where the turning point in monetary policy might be.