Something interesting has been happening in the interest rate futures market over the past few weeks. Quietly, without much fanfare, investors have started betting that the Federal Reserve is going to cut rates more aggressively in 2026 than almost anyone was predicting just a couple months ago.

According to the CME FedWatch tool, markets are now pricing in roughly two and a half rate cuts next year. Translation: two cuts are essentially guaranteed, and a third one is hanging out there with real probability. One cut is already baked in by June, a second by September, and the chances of a third by December are hovering around 45%.

Here's the context that makes this shift notable: back in September, the Federal Reserve's own Summary of Economic Projections indicated just one cut for 2026. So we've gone from the Fed signaling cautious patience to the market pricing in something meaningfully more dovish.

When Prediction Markets Get Specific

The CME data gives you the baseline, but Polymarket's distribution reveals where the real action is. Traders there see a base case of two to three cuts, but the probabilities fan out in a way that tells a bigger story.

The chance of zero cuts? Just 3%. One cut? Only 6%. The market has basically written off the "higher for longer" narrative for 2026.

The real cluster sits in the middle. Two cuts carry about 16% probability, but the single most popular outcome is three cuts at roughly 24%. That's the modal scenario—the one more people are betting on than any other.

But here's what jumps out: the dovish tail is surprisingly thick. Four cuts hold a 19% chance, five cuts come in at 10%, and six or more cuts collectively account for around 16% combined. Add it all up, and you've got odds well above 60% for four or more cuts.

So while everyone talks about two cuts as the safe bet, prediction markets are leaving the door wide open for something much bigger.

Polymarket Probability Distribution for 2026 Fed Cuts

The Hassett Factor

You don't usually see markets pricing in policy shifts based on a central bank leader who hasn't even been officially named yet. But this cycle is different.

Jerome Powell's term as Fed Chair expires in May 2026, and while the White House hasn't made a formal announcement, betting markets are giving Kevin Hassett—currently the National Economic Council director—more than a 70% probability of getting the job.

That expectation is doing real work in the rates market. Short-term yields have been slipping as traders anticipate a more activist Fed under Hassett's leadership. His track record suggests he'd prioritize maximum employment and respond quickly when growth shows signs of slowing. For investors, that translates to a lower bar for rate cuts than what we've seen under Powell.

In other words, the market isn't just pricing in economic fundamentals. It's pricing in a personality shift at the top of the Fed—and betting that shift means easier money.

What the Big Banks Are Forecasting

Research desks have started mapping out the post-December landscape, and most see cuts continuing well into 2026.

Bank of America expects the Fed's updated Summary of Economic Projections to show two cuts next year, followed by an extended pause. In their model, the policy rate bottoms somewhere between 3% and 3.25% and stays there through 2028. They also note that once Trump formally announces Powell's successor, Powell's influence on forward guidance could weaken, potentially nudging markets even further toward a lower-for-longer scenario.

Goldman Sachs' chief economist Jan Hatzius sees U.S. growth reaccelerating to 2% to 2.5% in 2026 as tariff headwinds fade, tax cuts kick in, and easier financial conditions take hold. Goldman expects a pause in January followed by two cuts by June.

Are We at a Turning Point?

The consensus is forming: at least two Fed cuts in 2026 are coming. But the more interesting story is the rising probability of a third cut—or more.

That decision, investors believe, will rest with whoever takes over from Powell. And the growing consensus around Hassett suggests the Fed could become more responsive to growth concerns and quicker to ease if the economy softens.

Nobody's calling for a dramatic pivot just yet. But the odds of a deeper easing cycle are very much alive, and they're climbing in lockstep with the likelihood that the next Fed Chair sees the world through a more dovish lens.